Topic: offsets

Insights from the Field: Forests for Climate and Timber

Maggie Barron — Mon, 06 Feb 2012 12:25:59 -0500

The Carbon Canopy is a novel partnership among companies, landowners, and nongovernmental organizations (NGOs) that seeks to leverage markets for ecosystem services to increase the area of southern U.S. forests certified as sustainably managed. The partnership aspires to sustain southern forests for their economic, climate, water, and other benefits.

The Carbon Canopy’s first focus has been on linking forest carbon offset generation and certified forest management, wherein carbon offset revenue is designed to compensate woodland owners for the cost of certification and provide an attractive new revenue stream.
The Carbon Canopy’s experience to date provides a number of insights for other organizations seeking to build and expand markets for forest carbon offsets linked with forest certification. These insights were gleaned from the authors’ observations as well as interviews with several members of the Carbon Canopy partnership, including landowners, buyers, and NGOs. These insights apply to building demand, ensuring supply, and creating the transactional infrastructure for forest carbon offsets and certified saw timber or wood fiber.
To build robust demand, companies, NGOs, and other organizations seeking to replicate the approach of combining forest carbon offsets and certification should—
- Actively recruit buyers; and
- Secure an anchor buyer early on.
- To ensure sufficient supply of offsets and certified timber, these organizations should—
- Invest in woodland owner education;
- Make the business case to woodland owners;
- Find upfront financing; and
- Be sure to engage all parties with claims on the land.
To create an efficient transactional infrastructure, these organizations should—
- Select forest management and carbon offset certification standards early on;
- Select standards that are high quality and that facilitate market participation; and
- Leverage existing resources and landowner networks.

Forests for Carbon: Exploring Forest Carbon Offsets in the U.S. South

Maggie Barron — Thu, 01 Sep 2011 16:34:42 -0400

Southern U.S. forests remove carbon dioxide from the atmosphere and store it in the form of carbon in leaves, roots, branches, trunks, soil, and woody debris and other plant litter through a process known as “carbon sequestration.” Through this process, southern forests and other woodlands play a role in regulating Earth’s climate and moderating the effects of global climate change.
Emerging voluntary and compliance markets often have provisions for greenhouse gas emission reductions or emissions avoided by preventing forest conversion or changing forest management practices. These reductions or avoided emissions are considered “forest carbon emission reductions.”
A “forest carbon offset” is a metric ton of carbon dioxide equivalent (CO2e), the emission of which is avoided or newly sequestered and is purchased by greenhouse gas emitters as a cost-control mechanism to compensate for emissions occurring elsewhere. Four types of forest carbon offset projects exist—reforestation, afforestation, forest conservation/avoided conversion, and improved forest management.
Forest carbon offsets can create an incentive for southern woodland owners to engage in land management practices that retain or restore forests and bolster forest carbon sequestration capacity.
Forest carbon offset projects must meet a number of quality criteria if they are to become credible, eligible for markets, and financially feasible for southern woodland owners. The main quality criteria include: assurance that the offset is real (including handling the issue of negative leakage), additionality/surplus, verifiability, permanence, and enforcement.
Recently, a number of carbon offset standards have emerged that adhere to these quality criteria. These standards provide a detailed list of offset project eligibility requirements, or “protocols,” as well as methods for quantifying and verifying a project’s net emissions impact. These standards seek to provide consistency in determining offset eligibility and quantification, improve offset credibility, and lower transaction costs for offset providers.
At present, from the financial standpoint of many southern woodland owners, income from forest carbon offsets alone is likely insufficient to outcompete real estate development. However, depending on landowner management goals and circumstances, income from forest carbon offsets might be sufficient in some instances to help pay incremental costs of sustaining forests, such as property taxes or sustainable forest management certification.
Forest carbon offset markets, like all other markets, require robust demand, adequate supply, and good transactional infrastructure. In light of these three conditions, southern woodland owners can take several initial steps to explore and prepare for existing and upcoming markets: (1) monitor market demand for forest carbon offsets, (2) conduct a solid forest inventory to assess the potential to supply forest carbon offsets, (3) engage in project development, and (4) enroll in a credible offset registry.

The Time Value of Carbon and Carbon Storage: Clarifying the terms and the policy implications of the debate

Maggie Barron — Mon, 01 Nov 2010 14:22:07 -0400

Executive Summary

The question of whether there is any value to the temporary storage of carbon is fundamental to climate policy design across a number of arenas, including physical carbon discounting in greenhouse gas accounting, the relative value of temporary carbon offsets, and the value of other carbon mitigation efforts that are known to be impermanent, including deferred deforestation. Quantifying the value of temporary carbon storage depends on a number of assumptions about how the incremental impact (or social cost) of a given ton of carbon emissions is expected to change over time. In 2009, a U.S. government interagency working group was established and assigned the responsibility of calculating social cost of carbon estimates to be used in benefit/cost analysis of regulations impacting carbon dioxide emissions. Those estimates were released in March 2010.

This working paper explores what those estimates imply about the value of temporary carbon storage, as well as the implications of those temporary storage values for several critical policy design questions relating to greenhouse gas accounting and biological offsets. This analysis suggests, for instance, that appropriate physical carbon discount rates for carbon accounting may be even lower than the social discount rates often used in intergenerational analyses. In the context of agricultural offsets, the social cost of carbon estimates are used to establish a definition of equivalence between permanent and temporary offsets; equivalence ratios are derived that vary between ~2 and 30, depending on the discount rate used and the length of the temporary offset contract period.

Bottom Line on Offsets

Maggie Barron — Sun, 01 Aug 2010 08:37:17 -0400

What are greenhouse gas offsets?

A greenhouse gas (GHG) or “carbon” offset is a unit of carbon dioxide-equivalent (CO2e) that is reduced, avoided, or sequestered to compensate for emissions occurring elsewhere. These offset credits, measured in tons, are an alternative to direct reductions for meeting GHG targets in a cap-and-trade system. In some systems, regulated facilities can buy offset credits from projects located in sectors or countries not legally required to reduce their emissions. The cost of meeting the GHG reduction targets of a cap-and-trade program can be reduced by buying offsets in cases where reducing GHG emissions at uncapped facilities or sectors is less costly than at capped sources. Many businesses and organizations currently buy GHG offsets to help meet voluntary commitments to reduce their GHG emissions.

What qualifies an activity as an offset project?

There are five commonly agreed-upon criteria that an offset credit must meet to ensure environmental integrity.

1. Real: GHG offsets must represent one ton of CO2e greenhouse gas emissions reduced or sequestered as a result of an activity undertaken for the purpose of reducing emissions. In practice, this ensures that total GHG emissions to the atmosphere are lower due to the implementation of the offset project, relative to a business-as-usual baseline scenario. Determining theoretical baseline emissions in the absence of the offset project (i.e., under the business-as-usual baseline) is not an exact science, so all baselines must be accurately and conservatively defi ned. The quantity of emission reductions should not be infl ated by incomplete accounting, which could occur if emissions were reduced at one location but increased elsewhere as a result (known as emissions “leakage”).

2. Permanent: Emission reductions or removals are permanent if they are not reversible; that is, the emissions can’t be rereleased into the atmosphere. The issue of permanence applies to projects where emissions are sequestered in ways that could be reversed over time, such as in forests (which can release carbon through fi res or decay) and through geological sequestration (where gases could potentially leak unexpectedly). There are mechanisms to account for or reduce the risk of reversal, though they can bring additional costs. These include buying insurance in case of emissions reversals, establishing a reserve “buffer” pool of credits or issuing temporary credits from the project that are valid for a period of time but must be re-certified or replaced in the future.

3. Additional: In order to generate offsets, a project must be a response to the incentives provided by a carbon offset market. Activities that would have happened without such incentives are business-as-usual and do not represent new emission reductions. Since offsets are used to compensate for continued or increased emissions elsewhere, if they are not additional then their use allows a net increase in GHG emissions. Additionality is ultimately a subjective judgment. Regulatory approaches attempt to ensure that additional projects are able to get credits while weeding out those that would occur in the absence of the incentive provided by the carbon market. For example, if regulation requires a landfi ll to capture the methane it produces, it cannot earn offsets for this activity. Since the landfi ll would have captured the emissions anyway, it is business-asusual and not additional.

There are two primary ways additionality can be determined in existing offset programs: on a project-specific basis or through standardized criteria. Project-specific additionality is determined through an evaluation of the proposed project against a range of alternative scenarios. The scenario deemed most financially viable and/or probable in the absence of the incentive provided by the carbon market is considered the business-as- usual scenario from which offset credits are calculated. Standardized additionality criteria evaluate projects against a set of consistent criteria for a particular project type and are intended to exclude non-additional projects, without developing a business-as-usual scenario for each individual project. This can include requirements that the project is not mandated by law, is not common practice (based on technology use or activity data),involves a specific pre-approved technology, and/or has an emissions rate lower than most others in its class.

The Clean Development Mechanism currently uses a project-specific additionality test to certify offsets for use to meet reduction obligations under the Kyoto Protocol. Other systems such as the Climate Action Reserve, EPA Climate Leaders, and the Regional Greenhouse Gas Initiative use standardized additionality approaches.

4. Verifiable: Credible offset programs require that emission reductions be monitored and regularly verified by an independent, qualified third party.

5. Enforceable: One credit can only credibly offset one ton of CO2e emissions; as a result, it must be tracked and it must be possible to enforce its ownership and use in order to avoid double counting. This is usually done via a registry.

Who can implement offset projects and earn emissions reduction credits?

Offset owners must be able to claim the legal right to the emission reductions of the project, usually through legal or contractual means. In addition, most offsets bought and sold today are certified by a third party certifier, who provides a “seal of approval” that the offset is providing the promised emission reduction benefit. Currently, U.S. facilities that are not operating under a regional GHG reduction program could attempt to claim offset credits. Once a federal climate program is in place, U.S. facilities will no longer be able to claim offset credits if they are located in a regulated sector.

How are offsets measured and tracked? What are standards, verifiers, and registries?

There are two primary markets for offsets: the regulatory market and the voluntary market. In regulatory markets, such as the Regional Greenhouse Gas Initiative, government agencies are responsible for establishing the standards for offset crediting and programmatic structure. In the voluntary market, the predominant market to date in the United States, there is no common standard for offset measurement and verification.

Various voluntary standards have been developed to provide independent quality assurance. A standard provides a detailed list of eligibility requirements for projects and methodologies for calculating a project’s emission reductions. Most rely on third party auditors, called verifiers, to perform the due diligence and attest to the veracity of the information provided by the project in its application. It must be verified that the project as a whole meets the standard, and that each individual offset credit issued is based on data that meets the requirements of the registry or policy program.

For a company with a voluntary commitment to reducing its carbon footprint, what value do offsets provide in GHG reduction strategies?

Purchasing and retiring (that is, not re-selling) high-quality offsets can be a useful component of an overall voluntary corporate emissions reduction strategy once internal abatement opportunities have been realized. The cost comparison of internal abatement versus offsets as a strategy is accurate only if evaluated over an appropriate time scale, such as the lifetime of the internal abatement (with appropriate discount rates) and if it includes all of the additional non-CO2 benefits of the internal abatement (such as greater efficiency or lower fuel costs). Also, it should be noted that it is more likely that future climate programs will recognize internal GHG abatement rather than offsets.

Which standard should I buy from or use to certify my project? Which is likely to be accepted in a federal program?

There is currently no bottom line on this question. The leading U.S. standards (ranked by the size of the 2009 market) include the: Climate Action Reserve (CAR), Voluntary Carbon Standard (VCS), Chicago Climate Exchange (CCX), American Carbon Registry (ACR), and The Gold Standard (GS). In general it is more likely that offsets certified under existing mandatory cap-and-trade systems (such as the Northeast’s Regional Greenhouse Gas Initiative (RGGI) or California’s AB 32) would be recognized automatically under a federal climate program, but this is not certain. Project types within sectors regulated by cap-and-trade policy will not be eligible to generate offsets because their emissions are covered by the cap. For instance, grid-connected renewable energy and energy efficiency projects are highly likely to be covered by a federal program and thus would be ineligible to produce offsets.

Additional Resources:

Broekhoff, Derik and Kathryn Zyla, 2008. Outside the Cap: Opportunities and Limitations of Greenhouse Gas Offsets. World Resources Institute Climate and Energy Policy Series. December 2008
Kelly, Alexia and Bianco, Nicholas “Options for Addressing Early Action Greenhouse Gas Reductions and Offsets in U.S. Federal Cap-and-Trade Policy”: WRI Working Paper. August, 2009
Offset Quality Initiative (OQI), 2008. Ensuring Offset Quality: Integrating High Quality Greenhouse Gas Offsets into North American Cap-and-Trade Policy. July 2008.

Detailed Summary of the American Power Act of 2010 Offset Provisions

Alexia Kelly — Mon, 21 Jun 2010 14:03:29 -0400

This document provides a detailed summary of the greenhouse gas (GHG) offset provisions in the American Power Act, which was introduced by Senators Kerry and Lieberman on May 11, 2010.¹

Download the PDF (PDF, 547 Kb)
View the full summary of the bill.

Domestic Offsets

Domestic Offsets

Program administration
Limits on offset use
Additionality
Quantification and leakage
Accounting for reversals
Offset approval, verification, issuance and auditing requirements
Productivity study
Early offset supply

International Offsets

Administration
Project sources
Eligible project types
Additionality
Quantification and leakage
Accounting for reversals
Exceptions and avoiding double counting

Related Programs

Early action recognition
Carbon Conservation Fund

Program administration: The Secretary² and Administrator³, in consultation with appropriate federal agencies, shall promulgate regulations establishing a program for the issuance of offset credits (Sec. 733, pg. 378). The Department of Agriculture is designated lead agency to determine eligible offset project types (Sec. 734, pg. 383), requirements for offset projects (Sec.735. pg. 391), approval (Sec. 736, pg. 404), and audits and review (Sec. 739, pg. 412) for domestic agriculture and forestry projects. Thereafter, the Secretary is designated “appropriate official” for domestic agriculture and forestry offset projects and the Administrator for all other offset projects.

Program Establishment: Not more than 18 months after the date of enactment the Administrator and Secretary shall promulgate regulations establishing a program for the issuance of offsets; regulations must include provisions to address additionality and permanence and establish a process to accept and respond to comments from third parties. Directs the Administrator to establish an offset registry (Sec. 733, pg. 378).
Eligible project types: Not later than 1 year after date of enactment the Secretary shall establish the initial list of eligible project types for which there are well developed methodologies for domestic agriculture and forestry projects; includes list of eligible projects (Sec. 734, pg. 383). The Administrator is responsible for all other domestic offset project types (Sec. 733, pg. 382). The Secretary or Administrator can add or remove projects from the lists by rule subject to certain provisions (Sec.734, pg.388). Any person may petition to modify the list after 180 days after the date of enactment (Sec. 734, pg. 390).
Methodology promulgation: Requires Administrator and Secretary to promulgate standardized methodologies within 18 months of a project type being added to list. The methodology must include provisions for addressing: additionality, baseline establishment, and leakage, and must ensure that offset credits provide for a reduction in net concentrations of GHGs (Sec.735, pg. 391).
Advisement: Establishes an independent “Greenhouse Gas Emission Reduction and Sequestration Advisory Committee” to provide guidance to the Secretary and Administrator on project types, areas of scientific uncertainty and acceptable qualification and quantification methodologies. The Board will issue a report with priority recommendations for ensuring the emission reduction integrity of the offset program no later than 240 days after it is established and periodically thereafter; it will also conduct a scientific review of offset program by 2017 and every 5 years thereafter (Sec. 732, pg. 367).
Program review: The program will be reviewed at least once every 5 years and revised if necessary (Sec. 741, pg. 421).

Limits on offset use:

System-level offset limit: No more than 2 billion tons of offsets annually may be used for compliance by covered entities (Sec. 722, pg. 331). The President may recommend to Congress whether the 2 billion ton limit should be increased or decreased (Sec. 722, pg. 336).
Entity-level offset limits: Covered entities may satisfy a percentage of their compliance obligation with offsets each year. This number is determined by the ratio of an entity‟s compliance emissions to system-wide compliance emissions in the year two years before the current compliance year multiplied by two billion (Sec. 722, pg.332).
Domestic/International offset limits: Of the total offsets allowed, not more than 75% can come from domestic offsets, and not more than 25% can come from international offsets. However, if the Administrator determines that less than 1.5 billion tons of domestic offsets at or below allowance prices are available, the Administrator shall increase the percentage of international offsets allowed up to a maximum of 1 billion tons. (Sec. 722, pg. 335).
International offset discount: After 2018, regulated entities must surrender 1.25 international offsets in lieu of 1 allowance (Sec. 722, pg. 332 and 336).

Additionality: The standardized methodology for determining the additionality of each type of offset project listed as eligible must assure, at a minimum, that the project or activity:

was not required by law;
was not commenced prior to January 1, 2009 (except for projects that commenced after January 1, 2001, that were registered as of the date of enactment under an offset program that the Administrator and the Secretary have approved under the early offset provisions under Sec. 740);
emits at levels below or sequesters at levels above an activity or emissions business-as-usual performance or practice for the relevant types of activity, as defined by a standardized activity or emissions baseline established by rulemaking by the Secretary. Allows establishment of a “temporal” baseline that can reflect a continuation of practices in place before the adoption of the offset project (Sec. 735, pg. 392).

Quantification and leakage: Directs the appropriate official to establish a standardized methodology for accounting for and mitigating any potential leakage and uncertainty of emissions (Sec. 735, pg. 394).

Accounting for Reversals:⁴

General Provisions: The Secretary shall prescribe at least one of the following to address reversals: an offset reserve, insurance or another mechanism. Credits will be placed in the reserve, managed by the Administrator, based on the risk of reversal and shall be subtracted from the quantity of offset credits to be issued. In the event of a reversal, the Administrator shall remove and cancel credits or allowances to fully account for the reversal. Allows the Secretary to lower the quantity of reserve offsets required due to “undue hardship” in the event of a catastrophic occurrence (Sec. 735, pg. 396).
- Intentional reversals: offset project developers shall replace 150 percent of cancelled credits.
- Unintentional reversals: offset project developers shall replace 50 percent of the credits reserved for that project or 50 percent of the reserve credits that were cancelled, whichever is less (Sec. 735, pg. 398).
Carbon agreements and land use flexibility: Allows the use of “carbon agreements and land use flexibility” mechanisms to address reversals from sequestration projects including: establishing a specific duration for the activity, clear liability for carbon accounting, sequential activities, adequate monitoring and accounting systems, carbon easements and other options as determined by the Secretary (Sec. 735, pg. 398). The Secretary may assign liability for reversals to any part of the carbon agreement for the purposes of carbon accounting (Sec. 735, pg. 400).
Crediting periods: 5-10 years for projects other than forestry projects; no more than 30 years for forestry projects. The representative of an offset project may petition for a new crediting period to commence after the end of the previous crediting period but not earlier than 1 year before the termination of a crediting period (Sec. 735, pg. 400).
Emission reduction integrity: The appropriate official shall apply conservative assumptions to protect the environmental integrity of the cap. Requires the Secretary to make available for public comment how the methodology or standard meets the requirements of this section and include an updated analysis in the record of the final rule (Sec. 735, pg. 402).
Additional Benefits and Data Collection: nothing in this section precludes an offset project from receiving offset credit because of receipt of payment from another source for an ecological service other than GHG emission reductions. Requires the Secretary to develop procedures and guidelines for determining eligibility for generating offset credits for an activity that is receiving payment for other ecological services. The appropriate official shall collect such data as are necessary to assess a range of factors relative to the performance of any offset project (Sec. 735, pg. 403).

Offset approval, verification, issuance and auditing requirements: Establishes approval process for offsets credits (Sec. 738, pg. 412) and verification guidelines requiring third party verification of projects by verifiers accredited by the Administrator and Secretary, potentially to include American National Standards Institute, with EPA and USDA given discretion to set accreditation standards (Sec. 737, pg. 407). The Secretary and Administrator are required to conduct random audits of offset projects and credits; however, they can delegate audit responsibility to States (Sec. 739, pg. 412).

Productivity Study: requires the Secretary to conduct an annual assessment of the amount of agricultural land that has been removed from agricultural production due to participation of landowners in afforestation offset projects and evaluate the impact of the offset program on a range of other issues (Sec. 741, pg. 419).
Early offset supply: Voluntary and regulatory offset program administrators may apply to the Administrator and Secretary for approval as an early offset provider. Programs shall be approved if they meet the following criteria:
- Established before Jan. 1, 2009;
- Have developed publicly available offset project type standards and methodologies that require emissions reductions be measurable, additional, verifiable, enforceable and permanent;
- Requires that emissions reductions are verified by an accredited state or third party, and are registered in a publicly available registry, among other criteria.
- Retired and expired credits are not eligible.
- Credits will only be issued for emissions reductions that occur after Jan 1, 2004, from projects commenced after January 1, 2001, based on a crediting period that commences not later than the date on which the requirements for the early offset program take effect and does not exceed the shorter of ten years or the established crediting period of the early offset program.
- The Administrator may revoke approval of a qualified program if it does not meet the above criteria or the approval of particular project type if the program fails to ensure that credits will be awarded for emission reductions that are not verifiable, additional, measureable, enforceable and permanent. Projects paid under the carbon conservation program that occurred prior to Jan. 1, 2009, cannot also receive early offset credit (Sec. 740, pg. 414).

International Offsets

Administration: The Administrator, in consultation with the Secretary of State and Administrator of USAID, may issue international offset credits based on projects that avoid, reduce or sequester emissions in developing countries⁵. Regulations must be promulgated within 2 years from date of enactment (Sec. 753, pg. 427).

Advisement: Establishes an independent “International Offsets Integrity Advisory Committee” to provide guidance to the Administrator on project types and program environmental integrity. The Board will issue a report no later than 180 days after it is established and periodically thereafter with “priority” recommendations for ensuring the emission reduction integrity of the offset program (Sec. 752, pg. 423).
Regulation: International offset credits may be issued only if: 1) the U.S. is a party to a bilateral or multilateral agreement that includes the country in which the project has occurred, 2) such a country is a developing country, 3) the agreement ensures all requirements included in APA apply, 4) offsets are appropriately distributed, and 5) the offset project representative is eligible to receive service of process in the U.S. (Sec. 753, pg. 427).

Project sources: Offset credits may be issued for projects identified by the Administrator under Sec. 733 through an approved international body, sectoral crediting mechanisms or international reduced deforestation as outlined in the APA. The Administrator may issue its own offset project methodologies in the event that certain conditions are met (Sec. 753, pg. 430).

Sector-based credits: Approves the issuance of offset credits based on sectoral crediting mechanisms targeted at sectors in any country that: 1) has comparatively high emissions or greater levels of economic development or 2) would be subject to a compliance obligation under Section 722 if it were located in the U.S. Provides detailed criteria for the establishment of sectoral baselines (Sec. 756, pg. 442).
Recognition of other programs: The Administrator can issue credits in exchange for credits issued by an international body established by the UNFCCC, a protocol to such convention or a treaty that succeeds such a convention as long as those credits were generated through a program that creates equal or greater assurance of the environmental integrity of the U.S. program. Sets limitations on credits issued after Jan. 1, 2016, to assure the international body issuing credits adheres to sectoral crediting rules consistent with those set out in the APA (Sec. 756, pg. 447).
Offsets from reduced deforestation: International offset credits are allowed only if the activity occurs in a country identified by the Administrator pursuant to the country‟s capacity to participate in such a program according to specific criteria. Offset credits can be issued relative to a national or sub-national baseline. Sub-national credits can only be issued for first 5 years of program. Includes extensive requirements for rights of forest dependent and local people and communities. Requires the Administrator to develop a list of eligible countries that have the technical and institutional capacity to participate in deforestation reduction activities at a national level and has a land use or forest sector strategic plan. National and State or province-level deforestation baselines must establish a trajectory that would result in zero-net deforestation not later than 20 years after the baseline was established. Allows credits to be issued to project developers relative to national baseline (Sec. 756, pg. 449).
Administrator issued international offsets: EPA may issue offsets not in the above categories if: 1) the cost of allowances reach the cost-containment reserve auction price for two consecutive years, and 2) the Administrator determines that less than the maximum limit of international offsets is not met. To qualify: 1) a project or activity must be located in a country that has entered into a bilateral or multilateral arrangement with the U.S., 2) that country must have developed and be implementing a low carbon development plan that includes provisions for the activity, 3) not be activities covered in the other offset categories, and 4) satisfy country appropriate criteria to ensure adequate treatment of leakage, additionality, and permanence (Sec. 753, pg. 431).

Eligible project types: Not later than 1 year after date of enactment the Administrator shall establish the initial list of eligible project types. The Administrator can add or remove projects from the lists by rule by rule at any time (Sec.754, pg.434). Any person may petition to modify the list (Sec. 754, pg.434). Offsets based on destruction of hydrofluorocarbons (HFC‟s) are prohibited (Sec. 755, pg. 442).

Additionality: The Administrator shall establish a standardized methodology for determining the additionality of each type of offset project listed as eligible. Such methodology shall assure, at a minimum, that any GHG emission reduction is considered additional only to the extent that the project or activity:

was not required by law;
was not commenced prior to January 1, 2009 (except for projects that commenced after January 1, 2001, that were registered as of the date of enactment under an offset program that the Administrator and the Secretary have approved under the early offset provisions under Sec. 740);
emits at levels below or sequesters at levels above an activity business-as-usual performance or practice for the relevant types of activity to reflect a conservative estimate of business as usual practice (Sec. 755, pg. 436).

Accounting for Reversals:⁶

General Provisions: The Administrator shall develop requirements that: 1) include provisions to report any reversal of any offset projects, 2) require allowances or offset credits to be held in quantities to fully compensate for any reversals and to assign responsibility for holding those credits, 3) discourage repeat intentional reversals, and 4) include any other mechanism the Administrator deems necessary (Sec. 755, pg. 437)
Mechanisms: The Administrator must prescribe at least one of the following: an offset reserve, insurance, or another mechanism to address reversals (Sec. 755, pg. 437).⁷
Crediting periods: 5-10 years for projects other than forestry projects; no more than 20 years for forestry projects (Sec. 755, pg. 439).⁸

Exceptions and avoiding double counting: The Administrator may modify or omit a requirement of the eligible offset project type section (Sec. 754, pg. 432), the requirements for offset projects section (Sec. 754, pg. 435) or the approval of offset projects provisions (Sec. 757, pg. 463) if the application of that requirement is not feasible, or would create offset credits ineligible for recognition under the UNFCCC (United Nations Framework Convention on Climate Change) and such modifications would not affect the integrity of the offsets issued and the cap. The Administrator should seek, by what means appropriate, to ensure that offsets are not double counted under a foreign or international regulatory system (Sec. 755, pg. 440).

Early action recognition: Establishes a program to recognize early offsets and early on-site reductions. Approximately 33 percent of the allowance set aside for this purpose is for offsets and early reductions, with the remaining 66 percent allocated to eligible state cap and trade programs. Credits issued by an Administrator-approved offset program under the early offset provisions (Sec. 740) may be exchanged for allowances. The exchange value will be determined by the average monetary value of the credits during the period of Jan 1, 2006 to Jan. 1, 2009. Only credits that have not been retired and were issued between Jan 1, 2001 and Jan 1, 2009 are eligible to receive allowances. Other types of non-offset documented early reductions are also eligible under this section. (Sec. 788, pg. 512).

Carbon Conservation Fund: An unspecified amount of allowances are set aside to provide incentives for additional activities (other than those qualified under the offset program) in the agriculture sector to reduce GHG emissions or sequester carbon to be administered by the Secretaries of Agriculture and Interior. The Secretaries must ensure that projects: 1) reward continuation of practices by early adopters, 2) support the development of new methodologies for offset projects, 3) ensure that action that was taken prior to the implementation of the offset program is not disadvantaged, 4) improve management practices that leads to greater sequestration on private and federal land, and 5) prevent conversion of land in ways that would increase GHG emissions. Compensation will be based on the amount of emissions reductions obtained and the duration of the reductions. Requires reporting of results to EPA and reviews every 5 years (Sec. 4152, pg. 878).

This summary applies only to the discussion draft of the American Power Act of 2010 released on May 11, 2010and not subsequent iterations ↩
Secretary means Secretary of the U.S. Department of Agriculture ↩
Administrator means Administrator of U.S. Environmental Protection Agency ↩
A “reversal” occurs when carbon stored in biological systems (e.g. forests or soils) is re-released into the atmosphere, thereby reversing the GHG reducing benefit of the offset credit. ↩
The term “developing country‟ means a country eligible to receive official development assistance according to the income guidelines of the Development Assistance Committee of the Organization for Economic Cooperation and Development. ↩
A “reversal” occurs when carbon stored in biological systems (e.g. forests or soils) is re-released into the atmosphere, thereby reversing the GHG reducing benefit of the offset credit. ↩
There appears to be a drafting error in this section of the bill, the language under both the reversal provisions and under crediting periods references section 734 of the bill, when they should reference 735. ↩
There appears to be a drafting error in this section of the bill, the language under both the reversal provisions and under crediting periods references section 734 of the bill, when they should reference 735. ↩

WRI Summary of the American Power Act (Kerry-Lieberman)

John Larsen — Tue, 08 Jun 2010 12:23:58 -0400

This summary provides a concise overview of the American Power Act (APA) released as a discussion draft by Senators John Kerry and Joseph Lieberman on May 12, 2010.

Download the Complete Summary (PDF, 1.4 Mb) (includes footnotes and references).

The APA is a comprehensive energy and greenhouse gas reduction bill consisting of seven titles:

Title I, Domestic Clean Energy Development
Title II, Greenhouse Gas Pollution Reduction
Title III, Consumer Protection
Title IV, Job Protection and Growth
Title V, International Climate Change Activities
Title VI, Community Protection from Global Warming Impacts
Title VII, Budgetary Effects

This summary roughly follows the structure of the bill. In some cases this summary deviates from this structure and groups together related components to facilitate understanding. For a detailed review of allowance value distribution under the APA please see Appendix A. For more information on specific components of the APA, please refer to the actual legislative language as referenced by section and page number in this document.

Fact Sheet: Stacking Payments for Ecosystem Services

Nicholas Bianco — Thu, 12 Nov 2009 09:29:42 -0500

Payments for ecosystem services are becoming an increasingly important part of the U.S. business and regulatory landscape. As programs that provide payments for ecosystem services grow, policy makers will need to determine how these various payments should interact with each other.

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(includes footnotes & references)
More WRI Climate Factsheets
More resources on Ecosystem Services

Introduction

Payments for ecosystem services are becoming an increasingly important part of the U.S. business and regulatory landscape. Used properly, these payments can efficiently mitigate greenhouse gases, filter pollution from runoff, protect wildlife habitat, and prevent soil erosion. Recognizing this, the American Clean Energy Security Act establishes a cap-and-trade program that allows firms to “offset” their greenhouse gas emissions through practices that reduce or sequester greenhouse gas emissions elsewhere. Some state governments are also expanding water quality trading programs that allow facilities that discharge water pollutants to avoid expensive facility upgrades by, for example, paying farmers to improve land management practices. There are also long-standing federal programs that pay farmers and forest landowners for providing a range of ecosystem services, such as protection of wildlife habitat and prevention of erosion.

As programs that provide payments for ecosystem services grow, policy makers will need to determine how these various payments should interact with each other. This interaction presents an opportunity to expand the suite of services for which an ecosystem is managed. However, it also creates the risk that multiple payments will be made for the same ecosystem services, possibly reducing the efficiency of payments or diminishing the environmental benefits they were intended to provide. This factsheet offers an initial review of these risks and opportunities. It is part of a larger effort by WRI to develop a comprehensive framework for stacking payments for ecosystem services.

For complete text, Download the PDF (PDF, 160 Kb)

Ensuring Greenhouse Gas Offset Quality in the Clean Energy Jobs and American Power Act

Alexia Kelly — Thu, 05 Nov 2009 09:37:13 -0500

S.1733, the Clean Energy Jobs and American Power Act (CEJAPA) also known as the Kerry Boxer bill , provides a number of important provisions that will ensure that offsets used in the U.S. cap-and-trade program represent real, additional, measurable and verified greenhouse gas (GHG) emission reductions.

This summary is based on the version of CEJAPA released on 10/30/2009 and not subsequent iterations. Inquiries can be directed to Alexia Kelly.

For more information, visit the U.S. Federal Climate Policy home page.

Offsets are used in lieu of reductions from sectors subject to mandatory emission reduction requirements; thus, offset quality is central to the environmental integrity and credibility of the cap-and-trade program. WRI’s review of the environmental quality criteria in CEJAPA affirms that its provisions will safeguard the environmental intent of the legislation. The CEJAPA lays a strong foundation that should be preserved in any future policy for an offset program that will deliver high quality offset credits. Critical program attributes are described below.

The Clean Energy Jobs and American Power Act:

Does not include a list of “per se” eligible offset project types. Per se eligibility lists require the offset program administrator to develop offset crediting methodologies for specified project types, regardless of their demonstrated ability to permanently reduce, avoid or sequester GHG emissions. In order to ensure offset quality, a full scientific review of any potential offset project type is of paramount importance in ensuring that offset projects are able to deliver real emissions reductions. CEJAPA ensures that offset project eligibility determinations are developed through a science-based, publicly-accessible rulemaking process conducted through the appropriate federal agencies with input from scientists and technical experts. (Sec. 733)
Establishes clear, consistent, and rigorous definitions of key offset quality criteria. This includes robust provisions to address additionality, leakage, impermanence, and measurement and quantification uncertainty through science-based, standardized, and transparent methodologies. These provisions will help provide assurance that offsets used in the program represent emissions reduction projects and activities that would not have occurred in the absence of the offset market and are measured against consistent criteria and quality definitions. (Sec. 734)
Includes strong provisions to ensure offset credits sourced from sequestration projects deliver permanent reductions. The bill provides stringent provisions that include buffer accounts, discounting, clear assignment of liability, and insurance mechanisms to ensure proper emissions accounting. These provisions ensure that the emissions reduction targets of the program are met in the event of a sequestration project’s emissions reduction reversal. (Sec. 734)
Places liability for intentional reversals with offset project developers and shares responsibility for unintentional reversals. Release of carbon dioxide stored in forests and soils can occur for a wide range of reasons. Reversals are typically classified as intentional (e.g. premature harvest of forests, tilling of fields) and unintentional (e.g. disease outbreak, pest infestation, forest fire). Clear liability for reversals is an integral part of ensuring the environmental effectiveness of the cap and trade program. Assigning complete responsibility for intentional reversals, and partial responsibility for unintentional reversals, provides a strong incentive for offset project developers and implementers to reduce the likelihood that reversals will occur and to take preventative action to avoid unintentional reversals. (Sec. 734)
Allows for program transparency, adaptation and flexibility over time. The bill allows for both the addition and removal of eligible offset project types over time, and includes a public petition process as a key component of this process. The bill also calls for regular (every 5 years) review and evaluation of the offset program. These are crucial elements of ensuring emissions reduction or sequestration projects receiving offset credit continue to meet high offset quality standards and that the program is able to adapt to changes in scientific understanding over time. (Sec. 733 and 739)
Establishes an Offsets Integrity and Advisory Board and Office of Offsets Integrity. The bill establishes an Offsets Integrity Advisory Board tasked with providing scientific and technical guidance to the offset program administrator as regulations are promulgated. It also establishes a new office of offsets integrity within the Department of Justice to ensure that the offset provisions are enforced and appropriate legal frameworks are in place to administer this unique program. (Sec. 731 and 743)
Establishes one verification program for the entire offset system. A robust verification program is a vital element of a credible offset program. Verification entities and protocols certify that emissions reduction projects meet the requirements of the regulatory offset program and establish the quantity of offset credits to be issued from a particular project. Developing multiple verification programs for U.S. compliance offsets could lead to inconsistencies in the U.S. offset market and compromise the quality of the offset credits issued. (Sec. 736)

Options for Addressing Early Action Greenhouse Gas Reductions and Offsets in U.S. Federal Cap-and-Trade Policy

admin — Mon, 24 Aug 2009 14:40:26 -0400

Offset Quality and the American Clean Energy and Security Act of 2009

Alexia Kelly — Tue, 21 Apr 2009 15:40:05 -0400

This summary applies only to the discussion draft released on 3/31/2009 and not subsequent iterations. Inquiries can be directed to Alexia Kelly.

For more information, visit the U.S. Federal Climate Policy home page.

The American Clean Energy and Security Act of 2009 (ACESA) provides a number of important provisions that will ensure that offsets used in the program represent real, additional, measurable and verified emission reductions. This document provides a brief overview of the most important of these. Offsets are used in lieu of reductions from sectors subject to mandatory emission reduction requirements, thus offset quality is of vital importance to the environmental integrity and credibility of a greenhouse gas reduction program. The ACESA lays a strong foundation for an offset program that will deliver high quality offset credits. Ensuring the integrity and quality of offset credits used in the system is crucial to the accomplishment of our domestic and global emission reduction goals.

The American Clean Energy and Security Act of 2009:

Establishes clear definitions of key quality criteria. This includes robust provisions to address additionality, leakage, impermanence, and uncertainty through standardized, transparent methodologies. These provisions will help provide assurance that offsets used in the program represent emission reduction projects that would not have happened in the absence of the offset market. (Sec. 734)
Keeps technical decisions with the Administrator. This includes the identification of eligible offset project types and the development of qualification and quantification methodologies and protocols. These provisions ensure that these critical design elements are crafted through a publicly-accessible rulemaking process guided by the U.S. Environmental Protection Agency (EPA) with input from scientists and technical experts. (Sec. 733)
Allows for program adaptation and flexibility over time. The bill allows for both the addition and removal of eligible offset project types over time. This is an important element of ensuring emission reduction or sequestration projects receiving offset credit are generating real, additional reductions of greenhouse gases beyond what otherwise would have occurred. The bill also calls for regular review and evaluation of the offset program. (Sec. 733 and 734)
Includes strong provisions to ensure offset credits sourced from sequestration projects deliver permanent reductions. The bill provides stringent provisions that include buffer accounts, discounting, clear assignment of liability and insurance mechanisms to ensure that emission are properly accounted for in the event of a sequestration project emission reduction reversal. (Sec. 734)
Establishes an Offsets Integrity and Advisory Board. The bill establishes an Offsets Integrity and Advisory Board tasked with providing scientific and technical guidance to EPA as it promulgates regulations and administers the program. Comprised largely of scientists, the Board will be an important resource of scientific and technical information for EPA. (Sec. 731)
Provides multiple mechanisms for engaging the international community through offsets. The bill allows EPA to employ both the approval of offset credits from international programs, as well as sector-based crediting mechanisms. Access to international offsets will be important to the U.S. to ensure both supply and liquidity of offsets in the system, particularly in the early years of the program. Allowing EPA the flexibility to implement circumstance-appropriate offset crediting mechanisms and approval processes will ensure the offset program has the flexibility to function effectively, while delivering real, verified and additional emission reductions. (Sec. 742)

How Realistic Are Expectations for the Role of Greenhouse Gas Offsets in U.S. Climate Policy?

admin — Sun, 01 Mar 2009 00:00:00 -0500

WRI Becomes Pioneer in Global Carbon-Offset Market

Nate Kommers — Thu, 08 Jan 2009 08:20:08 -0500

The World Resources Institute is now one of the first U.S.-based organizations to purchase Certified Emission Reductions (CERs) from the global compliance market established by the Kyoto Protocol.

Since CERs are used by countries to meet their obligations under the Kyoto Protocol, under which the scarcity of CERs is tightly controlled, they are generally much more expensive than offsets purchased in voluntary markets.

“A robust compliance market is necessary to fight global warming,” said Manish Bapna, WRI’s managing director. “Our offset purchases are part of a ‘walk the talk’ ethic that we have at WRI. They also afford a number of learning opportunities for the organization.”

Carbon offsets are used by governments and organizations seeking to counter their greenhouse gas emissions from sources like building energy use and employee transportation. The purchase of offsets will fund projects that would otherwise not move forward, often in developing countries, and will lead to an overall global reduction in carbon dioxide emissions.

Because the U.S. is not a signatory of the Kyoto Protocol, and because offsets under the Kyoto Protocol are more expensive, most U.S.-based organizations that offset their emissions of carbon dioxide look to voluntary markets for offset credits. In contrast, the global CER market was established by the compliance-based “Clean Development Mechanism” under the United Nations Framework Convention on Climate Change.

The offsets purchased by WRI are tied to the emissions reductions that have been achieved by specific projects. One is a landfill gas project in Nanjing, China, and the other is a wind power project in Tamil Nadu, India. WRI’s offsets were procured through EcoSecurities Group PLC, an independent project developer that specializes in sourcing, developing, and trading emission reduction credits.

“EcoSecurities is extremely pleased to provide WRI with CERs to neutralize its 2007 carbon emissions. It is extremely encouraging that an organization of WRI’s stature sees the merit in being one of the first U.S. based companies to purchase compliance market carbon offsets,” said Sonia Medina, U.S. country director at EcoSecurities.

In addition to the new CER purchase, WRI has long used other methods to help limit its carbon footprint. In September of last year, WRI and the American Psychological Association opened a green roof at their building in Washington, D.C. to help improve energy and water efficiency. In 2007, WRI’s office expansion was certified “gold” under the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) standard.

A detailed report of WRI’s CO2 inventories for 2006 and 2007 can be found at: http://www.wri.org/publication/co2-inventory-report.

Outside The Cap: Opportunities and Limitations of Greenhouse Gas Offsets

Tim Herzog — Wed, 31 Dec 2008 11:59:06 -0500

Carbon offset programs require the application of rigorous quantification, verification, and enforcement criteria in order to ensure that the integrity of greenhouse gas (GHG) caps is not compromised. Some types of climate change mitigation activities—especially those involving soil or forest carbon sequestration—are less likely to meet these criteria than others. It is possible to overcome these challenges, but doing so entails costs that might be avoided if these GHG reductions were achieved through other policies and measures. Deciding which types of GHG reductions to include in a carbon offset program should therefore be part of a broader strategy to achieve economy-wide GHG reductions at the lowest overall cost.

Conclusions and Recommendations

The analysis presented in this brief is not intended to suggest that entire categories of activities, such as carbon sequestration activities, should be categorically excluded from a U.S. carbon offset program. It does suggest, however, that U.S. policymakers need to carefully consider the various options for achieving GHG emission reductions in “uncapped” sectors of the economy. Carbon offset programs are attractive for many reasons, but they require the application of rigorous quantification, verification, and enforcement criteria. Some types of activities are less likely to meet these criteria than others, and many activities involving soil or forest carbon sequestration are at an inherent disadvantage. Policymakers should look holistically at the range of options for reducing emissions at uncapped sources, and set targets for capped sources as part of an overall suite of climate change policies.

In designing a U.S. carbon offset program, policymakers should:

Identify how much uncertainty is acceptable in quantifying the emission reductions (or net sequestration) from offset projects, taking into account measurement uncertainty, baseline uncertainty, and leakage. Although there will be no quantitatively “right” answer, policymakers should decide the maximum level of allowable risk of overstating real, additional emission reductions.
Evaluate whether emission reductions (or net sequestration) from specific kinds of projects can be reliably quantified within the acceptable range of uncertainty, taking into account existing protocols.
Decide on an appropriate mechanism for insuring against, and compensating for, reversals in carbon sequestration.
Evaluate the transaction costs for different kinds of projects associated with meeting acceptable levels of quantification uncertainty, and with insuring against reversals.
Decide whether specific types of projects can cost-effectively meet the requirements of a carbon offset program, or whether they should instead be realized through regulations or incentive programs.
Consider the level of emissions caps in light of an overall package of policies aimed at both capped and uncapped sources.

Creating Jobs With Climate Solutions: How Agriculture and Forestry Can Help Lower Costs in a Low Carbon Economy

Derik Broekhoff — Wed, 21 May 2008 00:00:00 -0400

Executive Summary

Carbon offsets can be an effective tool for lowering the costs of compliance in a cap-and-trade program, and are already being widely used internationally to comply with greenhouse gas emissions targets. To function well and maintain the integrity of a cap-and-trade system, carbon offsets must adhere to certain basic criteria and standards defining how they are quantified and certified. A number of programs around the world have begun developing such standards, but these standards would have to be carefully evaluated before being adopted under a U.S. regulatory program. Carbon offsets can come from many types of projects that reduce or sequester emissions. Some types of projects face higher quantification uncertainties than others, however, necessitating higher transaction costs in certifying the offsets they generate. These projects include certain types of forestry and agriculture carbon sequestration projects, which are subject to greater measurement and baseline uncertainties, reversibility, and leakage compared to other projects. It may be preferable in some cases fund these projects using direct payments rather than an offset market, in order to avoid costs of reducing uncertainties and lower the total cost of achieving emission reductions.

What are carbon offsets?

A “carbon offset” is a reduction in greenhouse gas (GHG) emissions that is achieved to compensate for, or “offset,” GHG emissions occurring at other sources.1 In a cap-and-trade system, carbon offsets allow emissions from regulated sources to increase above levels set by the cap, on the premise that those increases are compensated by reductions achieved at unregulated sources. Because reducing emissions at unregulated sources is often less costly, carbon offsets can lower the total cost of achieving an overall net emissions goal.

In an emissions market, carbon offsets can be traded in the form of certified “credits” or “offset allowances.” One credit usually denotes a reduction in GHG emissions equivalent to one metric ton of carbon dioxide (CO2). The terms “offset credit,” “offset allowance,” and “carbon offset” are often used interchangeably. In most cases, offset credits are issued for reductions achieved by specific projects, i.e., “offset projects”. In order to receive credits, the project owners must demonstrate that they have reduced emissions according to predefined rules and procedures. In principle, a wide variety of projects can generate carbon offsets. Examples include, but are not limited to:

Capturing methane created by landfills and flaring it or using it to produce energy (thus displacing fossil fuel combustion);
Installing equipment at chemical factories to capture and destroy industrial GHGs, such as HFCs or N2O.
Switching from high carbon-intensity fuels (e.g., coal) to fuels with low or zero net carbon emissions (e.g., biofuels) for energy production or transportation.
Improving the efficiency of energy production from fossil fuels, e.g., by upgrading commercial or industrial boilers, or exploiting opportunities to combine the production of heat and power.
Deploying equipment or appliances that use less energy (e.g., high-efficiency air conditioners or fluorescent light bulbs) and reduce demand for fossil fuels.
Planting trees or adopting forestry or land management practices that remove carbon dioxide from the atmosphere and sequester it.

Globally, markets for carbon offsets have grown rapidly over the last five years (Figure 1). The largest of these markets was created by the “Clean Development Mechanism” (CDM) established under the Kyoto Protocol. Through the CDM, emission reductions in developing countries can be used to offset emissions in industrialized countries, whose total emissions are capped by the Kyoto Protocol. The CDM effectively allows industrialized countries to achieve their emissions targets through a combination of domestic and foreign reductions. The CDM is also envisioned as a way to help less developed countries grow sustainably through the transfer and deployment of beneficial technologies and practices. A separate Kyoto Protocol mechanism, called “Joint Implementation” (JI) recognizes carbon offsets from projects in industrialized countries.

Figure 1. Annual Volumes of Carbon Offset Transactions in Millions of Tons of Carbon Dioxide Equivalent (See PDF)

A separate global market for carbon offsets has arisen to meet voluntary demand for GHG emission reductions. The voluntary offset market is driven by companies and individuals seeking to help avert climate change outside any regulatory obligation to do so.2 Although this market is growing rapidly, it has struggled with a proliferation of different standards and lack of consistent guidance on what constitutes a credible offset.

What are the basic requirements for carbon offsets?

To have a functioning market for carbon offsets, clear rules and procedures are required defining their creation and certification. Although these rules and procedures can differ from program to program, most of the literature on carbon offsets refers to a core set of basic criteria, derived from criteria established under the 1977 Clean Air Act. Specifically, offsets must be “real, surplus (or additional), verifiable, permanent, and enforceable” in order to maintain the integrity of an emissions trading system.4 Interpretations of these criteria vary, but their essence can be summed up as follows:

Real

An offset credit must represent an actual net emission reduction, and should not be an artifact of incomplete or inaccurate emissions accounting. In practice, this means methods for quantifying emission reductions should be conservative to avoid overstating a project’s effects. It also means that the effects of a project on GHG emissions must be comprehensively accounted for.5 Some projects may reduce GHG emissions at one source, for example, only to cause emissions to increase at other sources. A frequently cited example would be a forest protection project that simply shifts logging activities to other forest land, causing little net decrease in carbon emissions. Unintended increases in GHG emissions caused by a project are often referred to as “leakage.” For carbon offsets to be real, they must be quantified in ways that account for leakage.

Additional

Only emission reductions that are a response to the incentives created a carbon offset market should be certified as offsets. Reductions that would occur regardless of an offset market (e.g., those that result from “business as usual” practices) should not be counted. The rationale for this is straightforward. The basic premise of carbon offsets is that they maintain net GHG emissions at a level set by a trading system’s cap. Total emissions should be the same with or without an offset program. Since offset credits allow regulated sources in a cap-and-trade system to increase their emissions, offset reductions must be “additional” in order to maintain net emission levels. Crediting reductions that would happen anyway will result in higher total emissions than a cap- and-trade program without offsets.

Although this general concept (called “additionality”) is straightforward, it is vexingly difficult to put into practice. Determining which projects (and therefore which reductions) would not have occurred in the absence of an offset market is frequently challenging and always subjective. Within existing carbon offset programs, there are two basic approaches to determining “additionality”: project-specific and standardized.

Project-specific approaches seek to assess, by weighing certain kinds of evidence, whether a project in fact differs from an imagined baseline scenario where there is no carbon offset market. Generally, a project and its possible alternatives are subjected to a comparative analysis of their implementation barriers and/or expected benefits (e.g., financial returns). If an option other than the project itself is identified as the most likely alternative for the baseline scenario, the project is considered additional. The Kyoto Protocol’s CDM requires project-specific additionality tests.

Standardized approaches evaluate projects against objective criteria designed to exclude non- additional projects and include additional ones. For example, a standardized test may count as “additional” any project that:

Is not mandated by law
Is not a “least-cost” option (objectively defined)
Is not common practice (objectively defined)
Involves a particular type of technology
Is of a certain size
Is initiated after a certain date
Has an emission rate lower than most others in its class (e.g., relative to a performance standard)

Several U.S.-based carbon offset programs (including the California Climate Action Registry, the Chicago Climate Exchange, and the Regional Greenhouse Gas Initiative) have adopted standardized additionality tests. It is also possible to combine project-specific and standardized approaches.

Verifiable

Carbon offsets should result from projects whose performance and effects can be readily monitored and verified. Verification is necessary to demonstrate that emission reductions have actually occurred and can therefore be used to offset emission increases at regulated sources. Verification helps ensure that offset reductions are “real” and not overestimated. Because of the importance of maintaining net emissions levels within a trading system, projects whose effects are difficult to verify – or whose effects cannot be measured with reasonable precision – may not be suitable for generating carbon offsets.

Permanent

Since emission increases are effectively permanent (e.g., fossil fuel emissions cannot be put back in the ground), offsetting emission reductions should be permanent as well. Permanence is only an issue where the effects of a project can be reversed, such as forestry projects where carbon stored in trees or soils can be released to the atmosphere due to fires, harvesting, or other disturbances. In these cases, a mechanism is required to make reversible reductions/removals functionally equivalent to permanent reductions for the purpose of issuing offset credits. There are at least three possible ways to do this:

Issuing credits on a discounted basis. For example, only one credit is issued for every two tons of CO2 sequestered in trees or soils.7 Although this approach has been proposed in the literature,8 it has not been put into practice within existing offset programs.
Issuing temporary or expiring credits. Credits for reversible reductions can be made to expire at a predefined date, or canceled if verification indicates that a reversal has occurred. In both cases, the holder of the credits would have to procure other credits or allowances in order to remain in compliance with the cap-and-trade system. This approach has been adopted by the CDM for reforestation and afforestation projects.
Establishing an insurance or buffer system. Buyers or sellers of reversible reductions could be required to buy “insurance” in some form to compensate for reversals, or establish carbon sequestration buffers that serve the same function. There are many ways these mechanisms can be structured, and they may be combined with requirements for landowners to commit to maintaining carbon stocks over the long term (e.g., through easements). The U.S. Regional Greenhouse Gas Initiative has adopted this approach for reforestation projects.

It is worth noting that all of these mechanisms have the effect of either increasing costs for project developers or reducing the amount of compensation they receive per ton of emissions reduced or removed from the atmosphere.

Enforceable

Carbon offsets should be backed by regulations and tracking systems that define their creation and ownership, and provide for transparency. Clear definitions of ownership are essential for enforceability. For example, both the manufacturer and the installer of energy efficient light bulbs might want to claim the emission reductions caused by the light bulbs – as might the owners of the power plants where the reductions actually occur. Regulatory rules must establish who has claim to emission reductions, who is ultimately responsible for ensuring project performance, who is responsible for project verification, and who is liable in the case of reversals.

How can these requirements be realized?

To create a functioning market for carbon offsets, the criteria outlined above must be elaborated in set of standards and those standards administered by a regulatory body responsible for certifying and issuing offset credits. Standards are required to create a carbon offset “commodity” that is as uniform as possible, i.e., one offset credit equal to one ton of CO2- equivalent emission reductions regardless of where it is sourced. Three related sets of standards are necessary to fully define a carbon offset commodity:

Procedural and technical standards. These are standards related to the validation, monitoring, and verification of offset projects, as well as the certification and crediting of GHG reductions. Procedural and technical standards ensure that offsets are verifiable.
Contractual standards. These are standards for the establishment and transfer of property rights related to carbon offsets, for information disclosure, and for the assignment of liability. They can include terms for payment and delivery, allocation of risk, and compensation where emission reductions are reversed or not realized. Contractual standards are necessary to avoid double-counting of reductions and double- issuance of credits, and ensure that offsets are enforceable.
Accounting standards. These are standards related to the actual quantification of carbon offsets. Accounting standards specify methods for defining quantification boundaries, estimating baseline emissions, and correcting for unintended changes in emissions (i.e., “leakage”). Accounting standards also cover methods for demonstrating “additionality.” Finally, they may specify methods for treating reversible GHG reductions on an equal footing with permanent reductions. Accounting standards are a first-order requirement for ensuring that “a ton is a ton” and ensure that offsets are real, surplus, and permanent.

Are there existing standards for carbon offsets?

Yes, in fact there are quite a number. The challenge is deciding which ones might be sufficiently stringent and credible for a U.S. regulatory offset program. Current offset programs (both mandatory and voluntary) are probably most diverse in terms of accounting standards.

Internationally, an extensive amount of work has been done to clarify the basic requirements of carbon offset accounting. Two salient examples of this work are the Greenhouse Gas Protocol for Project Accounting (“Project Protocol”), developed by the World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD), and the ISO 14064 (Part 2) standard developed by the International Organization for Standardization – both of which provide a general framework for quantifying emission reductions from offset projects. To specify a truly standardized commodity for carbon offsets, however, requires elaborating these general requirements into “methodologies” or protocols aimed at specific types of projects. Such protocols streamline the quantification process, taking into account data requirements and analysis relevant to a particular project type.

WRI/WBCSD Project Protocol includes two sector-specific supplements, aimed at grid- connected electricity projects and land-use and forestry projects. Even these guidance documents, however, are too broadly specified to guarantee a true standard for carbon offsets. The task of developing standardized protocols has fallen to a number of individual programs that verify and certify offsets. The largest of these is the CDM. Table 1 summarizes the types of publicly available protocols and methodologies developed by the CDM and other programs around the world.

Table 1. Offset Protocols and Methodologies Developed Under Existing Programs (See PDF)

A thorough evaluation would be required to decide whether the protocols developed under these programs are suitable for a national U.S. regulatory offsets program. One of the challenges in designing offset protocols is that they require balancing tradeoffs. Protocols that are too stringent (e.g., with respect to additionality) may end up excluding good offset projects and raising overall compliance costs. Lenient protocols may allow too many reductions to be credited and therefore undermine the integrity of an emissions cap. Ideally, protocols should be developed and adopted according to how well they achieve desired policy outcomes for an emissions trading system, including objectives for environmental integrity, transaction costs, and administrative costs.13 Protocols developed under other programs may or may not fit the bill for a U.S. national GHG trading system.

What types of projects should be included in a carbon offset program?

Only emission reductions at sources not covered by an emissions cap can truly qualify as offsets. While it may be desirable to encourage reductions at covered sources, “crediting” such reductions must be done through some form of allowance allocation rather than the creation of offset credits.14 Only projects that affect sources (or sinks) of GHG emissions not covered by the cap should be included in an offset program. Under Senate Bill 2191 as currently drafted, for example, the following types of projects might be included in a domestic offset program:

Agricultural and rangeland management
Manure and livestock management
Forest, agricultural, and rangeland land-use change
Forest management practices
Fossil fuel (oil, gas, and coal) production, processing, and delivery
Landfill gas and waste management

In addition, it makes sense to exclude any projects that are likely to have adverse social, economic, or environmental effects. This is probably best accomplished through general eligibility criteria applied to projects, rather than the exclusion of project types.

Beyond these considerations, there is in theory no reason to limit the types of projects allowed in an offset program as long as they can meet the basic criteria outlined above (i.e., real, additional, verifiable, permanent, and enforceable). However, some types of projects will face greater risks and uncertainties relative to these criteria than others. The question becomes whether it makes sense to exclude some types of offsets on the basis of higher uncertainties and associated costs.

Are there differences in the credibility of offsets from different project types?

The “credibility” of a carbon offset largely depends on the level of confidence one has in its quantification, additionality, verification, permanence, and ownership. Broadly speaking, the risks and uncertainties for carbon offsets fall into four categories:

Measurement uncertainty. Accurately quantifying emission reductions requires being able to accurately monitor and verify the performance of a project and its effect(s) on emissions or sequestration. Accurate measurement is easier for some types of projects than others.
Baseline uncertainty. Accurately quantifying emission reductions also requires reasonable certainty about a project’s baseline emissions and its additionality.16 Baseline uncertainty will be higher for projects that have numerous possible alternatives, and for projects that provide significant compensation or revenue aside from their emission reductions.
Leakage potential. Accurately quantifying emission reductions requires accounting for any unintended increases in emissions caused by a project. Leakage can add significant uncertainty to a project because it often difficult to monitor and quantify. Some types of projects are more prone to leakage than others.
Reversibility risk. The potential for reversal of a project’s emission reductions creates uncertainty about its value as an offset. Reversibility is only a concern for projects whose emissions benefits result from sequestration.

In general, many types of forestry and agriculture carbon sequestration projects will face higher quantification uncertainty, because they are subject to greater relative measurement uncertainties, baseline uncertainties, reversibility, and leakage. Table 2 illustrates how some different types of offset project compare against these categories of uncertainty, based on qualitative analysis and a preliminary survey of carbon offset quantification literature. Further studies are needed to develop a full quantitative comparison for different project types, but there are generally clear differences between projects that avoid GHG emissions and those that sequester carbon.

Table 2. Illustrative Project Types and Their Associated Uncertainties (See PDF)

Can the risks and uncertainties for some project types be addressed?

In most cases, yes. There is no reason in principle why projects with relatively high quantification uncertainty cannot yield credible offsets. The only challenge is that methods to compensate for the uncertainty will tend to raise costs. For example:

Compensating for measurement uncertainties may require more costly measurement and verification practices, or the use of conservative estimates or discounts for quantified reductions. Both methods will increase the cost per ton of creditable emission reductions.
Compensating for baseline uncertainties may require more rigorous analysis and additionality tests (raising costs for project developers and/or program administrators), or similar application of conservative estimates that err on the side of under-counting emission reductions.
Compensating for leakage generally requires the incorporation of project elements designed to mitigate it,25 or the application of conservative methods to estimate its impact, both of which may increase costs relative to other types of projects.
Compensating for reversibility requires the adoption of one of the methods already described in this testimony (above), which will tend to either increase costs or reduce compensation to project owners.

The bottom line is project types with higher levels of quantification risk and uncertainty are likely to incur significantly higher costs for every ton of CO2 they reduce in order to have their reductions certified as offsets. Unfortunately, no studies have yet tried to quantify the likely size of this cost differential under a strict regulatory program.26 The added costs may have important consequences for how these types of projects fare in a broader market for GHG reductions. Furthermore, it may take time to develop protocols for some types of projects in ways that effectively mitigate uncertainty. This could lead to delays in how soon those projects can enter the market. Finally, even where the added costs amount to less than a dollar per ton of CO2, this could mean many millions of dollars of added investment burden across the entire market for carbon offsets.

Are there alternatives?

It may be worth asking whether some types of GHG emission reductions are best achieved through carbon offset markets or through other policy mechanisms. If the added costs associated with reducing uncertainties for sequestration projects could be avoided, for example, then greater reductions could in principle be achieved for the same total expenditure of resources.

One way to do this would be to fund these and other projects with high quantification uncertainties through a separate program of direct payments, or allowance set-asides.27 Unlike offsets, reductions achieved through direct payments would not be have to be used to compensate for increased emissions from capped sources, and therefore would not have to be subject to the same levels of scrutiny in terms of measurement, additionality, leakage, and reversibility. While it may still be desirable to fund reductions that are “real, additional, verifiable, permanent, and enforceable,” the application of these criteria would not have to be as stringent. For example:

Measurement of the effects of funded activities would be primarily for information purposes, and would not have to meet the same degree of accuracy needed to ensure that quantified reductions are truly offsetting emissions on a ton-for-ton basis. Avoiding and mitigating leakage from funded activities would be desirable, but the extent of leakage would not have to be rigorously quantified.
While it may be desirable to fund “additional” activities, demonstrating additionality on a project-by-project basis would not be necessary. Avoiding the need to develop and apply complicated additionality tests could reduce costs significantly.28
Verification of funded activities would still be necessary, but could be limited to a simple confirmation that activities are being undertaken rather than checking their performance in ways that are necessary for precise quantification.
Long-term carbon storage for sequestration projects would be desirable and could be encouraged, but designing complicated insurance mechanisms to put carbon sequestration on equal footing with permanent emission reductions would not be necessary.
Enforcement of a direct payment program would consist of ensuring that project owners follow through on their commitments, and would not require tracking systems or legal rules for establishing ownership of emission reductions.

Whether or not a direct payment system would make sense as an alternative greatly depends on how various other elements of a cap-and-trade system and offset program are designed. Total demand for reductions (determined by cap levels), the types offset projects allowed, and limits on the use of offsets will all play a role in determining price levels and whether “high transaction cost” projects can succeed in the market. The stringency required of offset protocols (based on
policy objectives, as described above) will also play a role. Further study is needed to determine which types of projects might best be encouraged through an offset program and which might be better achieved through direct payments. In the meantime, it makes sense to design policies that keep both options open for a variety of project opportunities in “uncapped” sectors.

Making the Carbon Offset Market Work

Derik Broekhoff — Wed, 13 Feb 2008 09:58:27 -0500

There are two ways the U.S. government could bring consistency and credibility to the voluntary carbon offset market: endorse an existing program and provide guidance, oversight and/or enforcement.

That was the basis of my testimony (PDF, 259 Kb) to the U.S. House of Representatives Select Committee on Energy Independence and Global Warming last July. Then last month, the Federal Trade Commission held a workshop to explore how to provide guidance and oversight.

The booming increase in sales in the voluntary offset market - growing globally from 6 million CO2-equivalent tons in 2004 to between 10 and 13 million tons in 2006 (and probably much more in 2007) - has led to a growing interest by federal policymakers in establishing regulations and standards for the purchase of offsets. While the FTC is looking at the voluntary market, the Lieberman-Warner global-warming bill percolating in the Senate includes measures for mandatory offsets and may be voted on this year.

As my presentation at the FTC workshop indicated, however, providing guidance about marketing claims for voluntary carbon offsets may be trickier than it seems. The reason is that there are various ways to substantiate and quantify emission reductions for carbon offsets, and the “right” way can depend on circumstances and your view of the overall objectives for the carbon-offset market.

It is hard to separate larger policy questions about the market from the methods used to certify offsets, something WRI and the World Business Council for Sustainable Development highlighted in our “Greenhouse Gas Protocol for Project Accounting,” published in November 2005 - see Greenhouse Gas Protocol. It may be easier to develop clear and consistent rules in the context of a mandatory program - like that envisioned under Lieberman-Warner - than for the voluntary market, where there is no central authority to decide unavoidable tradeoffs between things like transparency, practicality, and environmental integrity.

In the meantime, companies are moving forward in spite of uncertainties. The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard, has become wildly popular as a emissions-accounting tool for companies to measure their carbon footprints. In the past month alone, there have been dozens of media reports of companies - from wine makers to Dell to Pepsi - adopting the corporate GHG Protocol to inventory their emissions, despite the lack of mandatory oversight. We’ve been very busy fielding calls from interested businesses.

While it is important for companies to identify ways to reduce their greenhouse gas emissions internally, clearer standards for carbon offsets (either through oversight and guidance for voluntary markets, or the establishment of a mandatory government-offset program) would help these companies achieve even greater benefits for the environment.

Topic: offsets

Insights from the Field: Forests for Climate and Timber

Forests for Carbon: Exploring Forest Carbon Offsets in the U.S. South

The Time Value of Carbon and Carbon Storage: Clarifying the terms and the policy implications of the debate

Executive Summary

Bottom Line on Offsets

What are greenhouse gas offsets?

What qualifies an activity as an offset project?

Who can implement offset projects and earn emissions reduction credits?

How are offsets measured and tracked? What are standards, verifiers, and registries?

For a company with a voluntary commitment to reducing its carbon footprint, what value do offsets provide in GHG reduction strategies?

Which standard should I buy from or use to certify my project? Which is likely to be accepted in a federal program?

Additional Resources:

Detailed Summary of the American Power Act of 2010 Offset Provisions

Domestic Offsets

Table of Contents

International Offsets

Related Programs

WRI Summary of the American Power Act (Kerry-Lieberman)

Fact Sheet: Stacking Payments for Ecosystem Services

Introduction

Ensuring Greenhouse Gas Offset Quality in the Clean Energy Jobs and American Power Act

Options for Addressing Early Action Greenhouse Gas Reductions and Offsets in U.S. Federal Cap-and-Trade Policy

Offset Quality and the American Clean Energy and Security Act of 2009

How Realistic Are Expectations for the Role of Greenhouse Gas Offsets in U.S. Climate Policy?

WRI Becomes Pioneer in Global Carbon-Offset Market

Outside The Cap: Opportunities and Limitations of Greenhouse Gas Offsets

Conclusions and Recommendations

Creating Jobs With Climate Solutions: How Agriculture and Forestry Can Help Lower Costs in a Low Carbon Economy

Executive Summary

What are carbon offsets?

What are the basic requirements for carbon offsets?

Real

Additional

Verifiable

Permanent

Enforceable

How can these requirements be realized?

Are there existing standards for carbon offsets?

What types of projects should be included in a carbon offset program?

Can the risks and uncertainties for some project types be addressed?

Are there alternatives?

Making the Carbon Offset Market Work