Verification of Early Reduction Credits

1. Verification of Early Reduction Credits Ned Helme, President Center for Clean Air Policy Pew Center Early Action Conference, Sept 1999

2. Overview • Verifying voluntary emissions reductions • Baselines • Actual emissions • Verifying 1605(b) credits • An alternative approach to early crediting

3. Establishing Baselines • Emissions reductions are measured against a “baseline” or “reference case” • e.g., historic emissions levels • To prevent gaming, legislation should reward credits for company-wide reductions only • thus baselines must be company-wide • Only significant sources/gases need be included

4. Baselines, II • Companies should submit inventories documenting base year emissions • Like national inventories: Emissions = Fuel consumption x emissions factor • Direct measurement not needed • Key verification issue centers on establishing accurate historic baseline - proxy available w/ fuel consumption record

5. Calculating Actual Emissions • As with baselines, should be calculated on a company-wide basis by multiplying activity data by emissions factors • Both baseline and actual emissions can be converted to emissions/output if necessary - more difficult to choose metric w/ non-electricity sources

6. Verifying Reductions • Baselines should be certified prior to program inception - voluntary early redux depend fundamentally on this step • Actual emissions should be verified annually • Check math, activity data, emissions factors • Check numbers back to invoices, other records

7. Private Sector Role in Verifying Reductions • May be useful to require third party verification of credits • Could be done by accounting firms (e.g., Big 6), verification firms (e.g., SGS) • Auditors would have to be certified, follow pre-established guidelines • Third party involvement would allow for more comprehensive auditing (as opposed to sampling a la IRS)

8. Verifying 1605(b) credits • Will be necessary to separate legitimate reductions from others • Limit credit for single projects if company has not reported on company-wide basis • Process should be transparent, simple to implement • Not case by case analysis by implementing agency - too costly and time-consuming

9. Verifying 1605(b) credits, II • One alternative: Reward credits to participants that surpass industry benchmarks • e.g., develop industry average for utility heat rate improvements and reward above that • bulk of redux so far are concentrated in certain industries and sectors - would not require that many benchmarks • cap available credits at 1%

10. Problems with Voluntary Approach • Even rigorous verification will not ensure that credits are “real” if program is not structured properly • Baselines may be set to allow for non-additional tons • Hard to use rate-based approach in sectors other than power • Participants may shift high-emissions assets elsewhere

11. An Alternative Approach to Early Crediting • Early mandatory cap-and-trade program with auction (RFF) is preferable alternative • beginning in 2002, set overall cap equal to 1996 annual emissions level, auction permits with point of regulation upstream • allows “escape hatch” where companies can choose to pay $25/ton carbon in lieu of making full reductions

12. Alternative Approach (cont) • provides greater environmental benefits • no questions about whether redux are real • less prone to gaming - transfer of assets does not avoid regulation or bolster early credit claims • assists in moving economy more smoothly toward Kyoto compliance

13. Alternative Approach (cont) • simplifies verification problems • no issues regarding historic baseline • upstream so fewer entities to audit

14. Conclusion • Verification of emissions should be straightforward if company-wide approach to early crediting is taken • Review activity data, verify emissions factors • Even so, the voluntary nature of the program introduces questions about credit quality • A mandatory approach to early crediting would be environmentally superior