California is going to great pains to embrace agricultural and forestry carbon offsets in its cap-and-trade program. But despite the opportunities for additional land-based project types to be welcomed into the system, questions remain about their potential due to high monitoring and verification costs and other barriers.
April 22, 2014 | Among California’s greenhouse gas (GHG) emissions culprits, the agriculture and forestry sector ranks well behind transportation, which is by far the leading contributor to the state’s GHG emissions. But with the transportation sector scheduled to be phased into the state’s cap-and-trade program for GHGs starting in 2015, land-based offsets – emissions reductions generated via agriculture and forestry projects – potentially have a critical role in helping California meet its ambitious GHG targets.
The agriculture and forestry sector comprises only about 7% of the state’s GHG emissions, compared to 37.6% for the transportation sector, according to the most recent state GHG inventory data, released last year.
“I think there is a key opportunity for involving forestry and agriculture sectors in climate change mitigation efforts,” Derik Broekhoff, the Climate Action Reserve’s (CAR) Vice President of Policy, said at the Navigating the American Carbon World conference in San Francisco last month. “We have to find ways to bring them in, and offsets are a good lead-in to doing that.”
California’s cap-and-trade program started regulating electric utilities and large industrial facilities in January 2013, with the transportation sector scheduled to come under the program’s jurisdiction in 2015.
“California’s cap starting next year will be truly economy-wide, covering about 85% of emissions,” he said. “That remaining 15%, a lot of the potential is in the forestry and agriculture sector.”
The program already welcomes carbon offsets generated from livestock, forestry and urban forestry projects, with regulators issuing about 3.2 million offsets from these types of projects to date.
“I think we’re off to a really good start on land-based offsets,” said Belinda Morris, Program Officer, Climate and Land Use Subprogram, at the Packard Foundation.
But market participants see opportunities for other land-based project types to be added to the system, including avoided grassland conversion, wetland restoration, composting, rangelands and rice cultivation. The California Air Resources Board (ARB) could add rice cultivation as a new compliance offset protocol in September, making it eligible to generate carbon offsets for the program starting on January 1, 2015. The protocol guides the quantification, monitoring and verification of GHG emission reductions resulting from changes in water and residue management in rice cultivation.
“This could open the door for other potential crop-related protocols in the future,” Morris said.
The Climate Trust – an organization working to produce scalable offset protocols for both the voluntary and compliance markets – helped develop an avoided conversion of grasslands and shrublands methodology, which estimates the emissions avoided from preventing conversion to crop production. It will also buy offsets from the first project using the protocol, which was approved by the American Carbon Registry (ACR) in October 2013.
“I think there’s a lot of potential for grasslands,” said Dick Kempka, Vice President of Business Development for The Climate Trust. “There is a tremendous opportunity in the prairie portions of the United States, in California and other parts of the United States to scale this project type up.”
“We’ve had a lot of interest from different corporate social responsibility investors in this type of project,” he added.
ACR is also partnering with organizations such as the Sacramento Municipal Utility District to tailor an offset protocol for wetlands restoration originally developed for the Mississippi Delta to suit California. Projects under the developing protocol could potentially produce anywhere from seven to 26 million tonnes of avoided carbon emissions, according to ACR estimates.
The ARB is not ready to make any public announcements about the next set of protocols that could be allowed into the program, but is aware of the work being done by ACR and CAR to develop and road test wetlands, grasslands and rangelands protocols, said Rajinder Sahota, ARB’s Chief of the Climate Change Program Evaluation Branch.
“We follow the work that’s being done in the voluntary programs very closely,” she said. “There are a lot of ideas submitted to us, almost every week, about protocols.”
Many ideas don’t meet the basic principle of additionality since the proposed emissions reductions are derived from sectors that already fall under the regulation, such as the electricity sector, Sahota explained.
“I think sometimes folks forget how vast the cap is, that it will cover 85% of the economy, so we can’t give you an offset for solar panels,” she said. “But we’re continuing to look at the potential opportunities out there.”
California does not allow out-of-state offsets to be generated under project types that are not allowed in-state when the sector is already regulated. This policy limits potential offset protocols and is the reason why California does not have a landfill compliance protocol even though developers have lobbied for landfill gas offsets to be included in the program.
“That leaves very little on the table in the state, which by default leaves very little on the table nationwide,” she said.
California’s cap-and-trade program currently includes a compliance offset protocol to reduce methane from dairies. But a potential challenge to the currently-eligible protocol is featured in the ARB’s proposed update to the AB 32 scoping plan – the outline governing California’s compliance with its GHG emissions reduction law – to be considered by the agency’s top regulators in May. The proposed update features suggestions on how to achieve emissions reductions in the agriculture sector, including calling for a dairy digester workgroup to develop recommendations for a methane capture standard by 2016.
If the standard were adopted, it would make dairies regulated entities under AB 32 – making moot the offset protocol. But there is no date for development of a standard and no guarantee that the clause will make it into the final scoping plan, Sahota stressed.
“If that measure were to go forward, the California digester compliance protocol would no longer be an offset protocol because we would be regulating the sources from the time that potential measure took effect,” she said.
Despite progress in the development of land-based carbon offset protocols made over the last five years, there are still major challenges to offset generation. For CAR’s Broekhoff, the key question is the cost involved in generating an offset with a particular kind of project activity. He breaks these costs down into two categories: quantification costs, which involve measuring and quantifying emissions reductions – a serious challenge in the agriculture and forestry sector compared to other sectors –, and intrinsic costs such as capital and investment requirements.
“There is a lot of potential for relatively low-cost reductions in the agriculture sector, but some of these opportunities we’re talking about can be fairly marginal at the going price of carbon offsets,” he said. The prices for California-bound offsets have generally hovered around $9 per tonne.
In the land-based arena, CAR also has voluntary protocols for nitrogen management – which guides the quantification, monitoring and verification of GHG emission reductions from improving nitrogen use efficiency in crop production – as well as rice cultivation, but development under those protocols has been limited, likely due to the monitoring and verification costs, Broekhoff said.
“I think to some extent folks are waiting to see if these protocols get picked up in the compliance program where prices are higher,” he said. “That will make a difference.”
Aggregation – bringing together a number of different project activities and grouping them together in a way that they can be considered a single project – seems to be the solution to reducing the monitoring and verification costs of land-based offsets and CAR is looking to build aggregation directly into future versions of some of its offset protocols, Broekhoff said.
“At the current rates of the voluntary marketplace and in the compliance marketplace, it’s not cost effective unless you can aggregate farms into single projects,” said Debbie Reed, Executive Director, Coalition on Agricultural Greenhouse Gases, which is working on a proposal outlining how aggregation can be done and addressing key issues such as how to conduct sampling and verification.
Another major challenge is developing an effective communication strategy for dealing with farmers and forest landowners, including a coordinator who can work directly with them to provide technical assistance in getting offset projects registered and who understands what drives their decision-making, particularly from an economic perspective, they said.
“To make a project work, we really have to get in the head of the landowner on the land-based side,” Kempka said.
One issue that often gets lost is the legal challenges to the overall offset program, Sahota said. The Citizens Lobby and Our Children’s Foundation filed suit over the program’s offset protocols and although the ARB prevailed in court in January 2013, the ruling is under appeal.
“Any time there’s a lawsuit on a program, it adds an element of uncertainty,” Sahota said. “It’s not just uncertainty to the offset program, it’s uncertainty to the overall market program and that’s something you always want to avoid because we want to have a clear signal for the price of carbon.”
Because of the litigation uncertainty, the ARB walks a fine line between ensuring the success of the cap-and-trade program and knowing one wrong move will be used to push an agenda, such as not extending the program beyond 2020 and proceeding to direct regulation of emitters or lowering the 8% offset usage limit, she said. So while it is true that the agriculture and forestry sectors are uncovered and present an opportunity for offsets in California’s program, the ARB must be sure that any moves to adopt additional protocols will not make the program vulnerable to legal challenges, Sahota said.
“We love land-based offsets,” she said. “We think it’s a good sector to look at. It’s the challenge of making sure those offsets meet the criteria of the current regulation and making sure that a tonne for an offset is the same as a tonne for an emission in the regulated sectors.”
The voluntary carbon market has been the breeding ground for offset project types welcomed into California’s regulated carbon market, which many say will face a shortage of offsets in its second phase. Market participants, including an official at one of the largest publicly-owned utilities in the United States, say it is critical for California regulators to quickly welcome even more voluntary project types. | Originally published on Ecosystem Marketplace
14 April 2014 | Offering its residential customers a chance to minimize the impact of their lifestyles and electricity usage on the environment has been the focus of the Sacramento Municipal Utility District’s (SMUD) Carbon Offset Program since it launched in 2007. Now SMUD, the public utility for Sacramento County and parts of nearby Placer County in California, is diving deeper into the carbon markets by helping to pay for the development of a new carbon offset project type that focuses on the restoration of wetlands in the state. SMUD is taking this step because the cap-and-trade program that it is regulated by enters its second phase in 2015, and many experts say its narrow palette of recognized offsets won’t meet projected demand starting in 2015 through the life of the program.
SMUD – one of the 10 largest publicly-owned utilities in the United States – allows its customers to lower their contributions to climate change with a $10 per month added charge on their bills. The charge has financed the purchase of carbon offsets from projects registered under the Climate Action Reserve (CAR), – an offset registry that supports projects to reduce greenhouse gas (GHG) emissions – including offsets generated by a dairy digester.
The utility joined forces last year with the American Carbon Registry (ACR), a different offset registry organization, and other partners on the development of a new method (or protocol) that would count the GHG emissions reductions created from projects that restore California deltaic and coastal wetlands and turn those into offsets for both the voluntary and eventually, they hope, for California’s regulated carbon market.
SMUD set out to identify voluntary offset protocols that are good candidates for acceptance by the California Air Resources Board (ARB), – the regulatory agency overseeing the state’s carbon market – that have potential to deliver GHG emissions reductions within California and that also deliver co-benefits – social, economic and environmental benefits beyond carbon reductions. The utility started out with a list of 12 project types and narrowed the list down to six after research and discussions with stakeholders, Obadiah Bartholomy, SMUD’s Senior Project Manager, told attendees at the Navigating the American Carbon World conference in San Francisco last month.
The list of offset project types that could be added to the state’s roster – which currently includes forestry, urban forestry, livestock and ozone-depleting substances protocols originally developed in the voluntary market – and would benefit from a demonstration project or further development includes avoided conversion of grasslands, nutrient management, rangelands soil carbon sequestration and enteric fermentation, he said. Rice cultivation, which the ARB could approve in September, was also on the list.
However, the protocol that caught SMUD’s attention was wetlands restoration, with the partners tailoring an ACR protocol already developed for the Mississippi Delta to suit California. The California version is still under development and has a long ways to go before producing offsets for the state’s regulated market, likely not until 2018, assuming California regulators adopt the protocol, he said. But the protocol has the potential to produce a significant amount of offsets – anywhere from seven to 26 million tonnes of avoided carbon emissions, according to ACR estimates – and has the attractive co-benefits that SMUD is actively looking to support.
“The others, other than rice, seemed a little farther out with even more barriers to expanding supply, not to say that we shouldn’t pursue them,” Bartholomy said. “We have to keep in mind that this is a very long-term endeavor that we’re embarking on.”
To date, the ARB has issued more than 7.5 million offsets, which should be plenty for the first phase of the program given that some organizations, particularly smaller entities, regulated by the cap-and-trade program have been slow to embrace offsets, market experts said.
SMUD, which is regulated by the cap-and-trade program because of its natural gas facilities and power imports, is one of the entities that have so far hesitated to make use of offsets to fulfill its compliance obligations, Bartholomy admitted.
“SMUD is one of those that’s kind of on the bubble,” he said. “I think we are going to make use of our 8%, but it takes some internal education and discussion and some willingness for us to bite the bullet.”
What the experts are concerned about is what they say is the likelihood that there will be a shortage of offsets in the middle and latter years of the program. California entities are allowed to meet up to 8% of their compliance obligations using offsets, meaning that the maximum demand during the second phase of the program in 2015-2017 is 91.8 million offsets. While many experts say the 8% maximum will never be exhausted, they are concerned that there will simply not be enough offsets generated under the four project types currently allowed in the program.
“My view is that the offset supply will be extremely short,” said Derek Six, CEO/CFO of offset project developer Environmental Credit Corp. “I think we’ll be short for a very long time.”
Consultancy Alpha Inception projects that total demand for offsets will only be about 50% of the possible maximum demand, meaning that the market should come out of the first compliance period with a pretty big surplus, but could be short in the second and third phases depending on what else happens in the market, said Founder and Manager Director Andre Templeman.
Another concern is that it takes time – usually several years – to get through the ARB’s rigorous evaluation process, the experts noted. In fact, the rice cultivation protocol, as well as one for coal mine methane projects, have been delayed several times as top regulators have sent their staff back to the drawing board for further examination and development.
“They are being extremely conservative and with good reason,” Templeman said. “They don’t want any holes to be opened up, especially in these early years of the program.”
California’s cap-and-trade program is currently scheduled to end in 2020, but there are discussions about how to meet the state’s 2030 target for reducing GHG emissions, with continuing the program –including the offsets component — being an option on the table.
“In those types of timeframes, expansion of supply through additional protocols is quite viable,” Bartholomy said.
California’s offset market has been plagued by a host of regulatory and legislative disruptions that have had the effect of restraining the development of offset projects, Templeman said. For example, a bill introduced into the California legislature last year by Senator Ricardo Lara sought to exclude all offsets outside of the state. The bill, which is likely to resurface this year, eventually was amended to focus its restrictions on international offsets because of arguments that California’s stringent environmental regulations would severely limit in-state offset development, he said.
“That’s the reality,” Templeman said. “If you took all of the out-of-state offsets out, you wouldn’t leave very many behind. That would be an interesting bill were it to pass because I think that would affect supply quite dramatically and in essence create a massive shortage.”
“That pressure is not going to go away,” he added. “There will be a bill at some point that will basically seek to say ‘we’re paying for it, we want some of the benefits to be local’.”
Another proposal not specific to the offset program would exempt the transportation sector that is scheduled to be phased into the cap-and-trade program in 2015 from its grasp by instead implementing a carbon tax on fuels. While the odds of the proposal making it into law are not strong, that bill if adopted would have a dramatic impact on the offset market because removing the transportation sector would have the effect of turning a market that is projected to be short into one that could be oversupplied by a factor of two, Templeman said. The mere proposal is problematic because “even if the bills themselves die, there are reasons these bills come up,” he said.
And then, of course, there are the so-called buyers’ liability provisions of California’s cap-and-trade program, which allows the ARB to invalidate offsets that the agency deems problematic and forces the buyers of these offsets to take responsibility for replacing them. The risk adds to the cost of buying offsets and makes them a less attractive option for smaller entities, Templeman said.
“You really have to be over a certain size before it really makes a lot of sense in today’s current market design,” he said, adding that he expects products to emerge during the second and third compliance periods that will address the invalidation risk for a cost.
Other concerns that have kept smaller entities out of the market, including the potential of getting stuck with offsets they did not need to purchase, should subside after the first few years of the program, Bartholomy said.
“I think that fear will recede as the market continues to demonstrate success,” he said.
Aside from adopting protocols from SMUD’s list of potential candidates, the ARB could also amend their rules to maximize the supply generated from the protocols already eligible. The costs of verifying the emissions reductions generated by livestock projects, for example, under current ARB rules are so high that they essentially exclude more than 95% of the dairies in the United States from participating in the program, Six said.
And the ARB could revisit voluntary offset protocols that it has previously rejected, such as pneumatic valves in the oil and gas sector, nitric acid production and organic waste digestion, in part because of the view that some of these activities are already regulated even if the specific emissions reductions associated with them do not fall under the carbon cap, Bartholomy said.
“Unfortunately, the logic behind that is still kind of murky,” he said. “I think we can hold out some hope that maybe if there is a shortage they may be willing to expand the offset supply.”
The Yurok Indian tribe became the first organization to cross the finish line in getting forestry compliance offsets approved by California’s cap-and-trade program. And the first issuance was a big one, with the tribe receiving 836,619 offset credits for an improved forest management project on tribal lands.
April 9, 2014 – The Yurok tribe has seen first-hand the devastation that deforestation wreaks on trees and plant and animal species living on its tribal lands. Now, with a big stamp of approval from California regulators, the tribe is hoping to tap into the carbon markets to help reverse these devastating trends.
The California Air Resources Board (ARB) on Wednesday announced that the Yurok Tribe/Forest Carbon Partners CKGG Improved Forest Management Project was the first to be issued offsets under its compliance forestry protocol. The improved forest management (IFM) project will guarantee long-term forest protection, improve forest habitat diversity, provide benefits to salmon and steelhead populations, and generate revenues for the Yurok Tribe. IFM projects are those in which existing forest areas are managed to increase carbon storage and/or to reduce carbon losses from harvesting or other silvicultural treatments.
“We have lost many of our old trees to deforestation, and numerous native plant and animal species, especially deer and elk, are struggling because of it,” said Thomas P. O’Rourke Sr., Chairman of the Yurok Tribe. “This forest carbon project enables the Tribe to help transition these acres back into a tribally managed natural forest system where wildlife and cultural resources like tanoak acorns, huckleberry, and hundreds of medicinal plants will thrive.”
The ARB’s compliance protocol was developed based on a version originally created by the Climate Action Reserve (CAR), which acted as the Offset Project Registry for the Yurok project, meaning the CAR pre-screened the project on behalf of the ARB. Forest projects that qualify under the cap-and-trade program must maintain or increase carbon in live trees for more than 100 years, a requirement that was originally established in CAR’s forestry protocol.
The Yurok project, which covers 8,000 acres of tribal land in Humboldt County, California, was issued 836,619 offsets by the ARB. By comparison, about 2.2 million forestry offsets have been issued by the ARB under the early action protocol – referring to offset projects initially developed under approved voluntary protocols that are transitioned to ARB offsets for use in the cap-and-trade program – since the first early action forestry offsets were issued in November 2013.
“The acceptance of this project into California’s carbon market will encourage other public and private owners of forest lands to develop offset projects,” said Linda Adams, former Secretary of the California Environmental Protection Agency and Chair of CAR’s Board of Directors
Regulated entities are limited to purchasing offsets for up to 8% of their compliance obligations under California’s cap-and-trade program.
“This project will offer California companies additional opportunities to find cost-effective ways of complying with the cap-and-trade program,” said ARB Chairman Mary Nichols. “It offers additional carbon reductions from a sector not covered by the cap-and-trade regulation, while providing financial resources to help the Yurok tribe restore its native lands and protect its watershed and habitat.”