Use of GHG Project Offsets Reviewing Existing Programs

1. Use of GHG Project Offsets Reviewing Existing Programs Jonathan Pershing World Resources Institute 2nd Stakeholder Meeting of the Regional Greenhouse Gas Initiative Boston, MAThursday, May 20, 2004 J. Pershing, RGGI, May 2004

2. Overview • Rationale for/against offsets • Alternatives to offsets • Review of existing programs with consideration of key issues • Conclusions J. Pershing, RGGI, May 2004

3. Rationale for using GHG offsets Pro • Reducing individual and system costs by extending compliance options – adds compliance flexibility • Brings in new/ uncovered sectors and facilities • Allows industry outside of capped sectors to “test” working of system • Creates opportunities for innovation • May make political agreement on cap easier – now and in future • Some sources that are difficult to quantify in cap-and-trade can be accurately measured in offset program J. Pershing, RGGI, May 2004

4. Rationale for using GHG offsets Con • Adds administrative complexity and costs • Assuring quality/ environmental integrity of offsets is difficult • Reduces incentives for new entrants to join trading system J. Pershing, RGGI, May 2004

5. PRO: Cost reductions can be significant with project offsets regional marginal costs, US$ per ton of carbon *unlimited CDM Source: IEA Analysis of Kyoto compliance with US, no transactions costs J. Pershing, RGGI, May 2004

6. CON: Undermines environmental integrity “…most of the projects would have been realised even without CDM-finance, which implies that the …support has no added value….It would certainly be optimal to prove unambiguously that non-feasible projects would turn into feasible, due to CDM-finance. Unfortunately, this "financial additionality" appears to be a very weak selection criterion. Practice shows that such forecast calculations could be adjusted in favour of any desired outcome.” -- VROM (Netherlands), review of NGO critique J. Pershing, RGGI, May 2004

7. Alternatives to Offsets (1) • Opt-ins • Allows facilities not covered initially to become covered (capped) and receive and trade allowances • Implies participation in emissions monitoring/reporting/inventory requirements • Determining stringency of opt-in caps challenging • Used in acid rain program – but problematic here, as only sources already reducing opted in J. Pershing, RGGI, May 2004

8. Alternatives to Offsets (2) • Set-asides (under a cap) • Provide allowances to owners of non-covered facilities • Allowances may be banked or traded • Rules for set-asides have elements similar to those of offsets: • Project is not otherwise required or generate other compliance/ permitting credits • Project operates in the years it receives credits • Project should reduces/displaces emissions   • Emissions reductions are measurable/verifiable • Do not change overall emissions (come out of cap) • Used in NOx Budget Trading Program J. Pershing, RGGI, May 2004

9. GHG Offsets Programs • International programs • UNFCCC/Kyoto Protocol (JI, CDM) • EU Emissions trading system (through its linking directive) • World Bank – Carbon Finance (PCF and others) • National programs • Dutch CERUPT/ERUPT Programs • Canada • Denmark • Japan • US Activities Implemented Jointly, State programs (e.g., Oregon Climate Trust) • Private sector programs • Chicago Climate Exchange (CCX) – project offsets Non-GHG offsets programs (such as NOx, SO2 and others) nor CO2 adder programs are considered here J. Pershing, RGGI, May 2004

10. Key Issues (1) • Offsets location • Issue: inside or outside of the region where cap applies? • Conflict: reduced permit price vs. administrative costs, potential loss in environmental integrity and sending revenues out of region • Allowed Sectors • Issue: which sectors, which gases • Conflict: reduced permit price vs. lack of certainty in emissions quantification (includes issues of double counting and indirect emissions) • LULUCF • Issue: whether to allow forest/agriculture/soils offsets • Conflict: reduced permit price and added industries vs. lack of certainty in emissions quantification and permanence concerns • Limits to allowable use • Issue: Share of reductions to be allowed from offsets • Conflict: reduced permit price vs. promoting local emissions reductions J. Pershing, RGGI, May 2004

11. Key Issues (2) • Timing • Issue: what are the start/end dates for project crediting • Conflict: allowing more projects vs. additionality • Verification • Issue: How stringent/what procedures to be used • Conflict: transactions costs vs. environmental integrity • Special treatment for renewable energy • Issue: Should offsets promote RE • Conflict: least cost options vs. technology push incentives as well as accuracy of offset calculation vs. simplicity and feasibility • Baseline rules • Issue: What rules for ensuring additionality • Conflict: limiting project numbers vs. environmental integrity of each project (limiting leakage, successful monitoring over time) J. Pershing, RGGI, May 2004

12. Offsets locations J. Pershing, RGGI, May 2004

13. Allowed Sectors J. Pershing, RGGI, May 2004

14. LULUCF Treatment J. Pershing, RGGI, May 2004

15. Limits to Allowable Share of Offsets J. Pershing, RGGI, May 2004

16. Timing J. Pershing, RGGI, May 2004

17. Verification J. Pershing, RGGI, May 2004

18. Special Treatment for Renewable Energy J. Pershing, RGGI, May 2004

19. Baselines determine crediting levels • Baseline level and crediting lifetime determine maximum number of credits from a project baseline emissions potential credits project emissions time J. Pershing, RGGI, May 2004

20. Brazil: possible implications of standardised baselines in the electricity sector 1000 900 Fossil fuel only 808 800 North-Isolated region 700 675 600 tCO2/GWh Natural gas only 500 426 400 382 Natural Gas (BAT) 300 200 All sources 108 100 0 Wind Natural gas (BAT) Possible emission credits under different multi-project baseline options J. Pershing, RGGI, May 2004

21. Baseline Procedures J. Pershing, RGGI, May 2004

22. Offset Program Prices * EU price has declined in the past few weeks as national allocations priced in market Source: CO2e, Natsource, PCF, CCX J. Pershing, RGGI, May 2004

23. Criteria for Program Evaluation • Broad coverage, incentivizing lowest cost reductions wherever they occur • CDM is relatively high • Assuring environmental integrity of cap (limiting “non-additional” projects); requires methodology with high confidence • CDM is unclear (projects rejected by EB – and criticized by NGOs; more projects recently passing screening) • Reducing uncertainty for developers • CDM is low (note numerous project proposal rejections) • Minimizing transactions costs for developers • CDM is low (estimates run to several hundred thousand $ ) • Minimizing oversight costs for program managers • unknown J. Pershing, RGGI, May 2004

24. Some very generic conclusions • While the rationale for offsets has prevailed (in that many systems are being explored), the difficulties in operationalizing programs has meant relatively slow starts • However, level of industry interest has been quite high (number of applications rapidly increasing and suggests that offsets have mobilized innovation • A review of the existing programs suggests that several solutions have been found to minimize environmental integrity loss; it is still too early to assess success in this domain. • Prices suggest that offsets are less expensive than trades within and between capped parties. J. Pershing, RGGI, May 2004

25. References • UNFCCC Clean Development Mechanism; COP-7 Report, part 2, p. 20-50 http://unfccc.int/resource/docs/cop7/13a02.pdf • UNFCCC Joint Implementation: COP-7 Report, part 2, p. 5-19: :http://unfccc.int/resource/docs/cop7/13a02.pdf • EU Offsets Program: Greenhouse gas offsets: an introduction to core elements of an offset rule; Discussion Paper C3 – 05; October 2002: http://www.climatechangecentral.com/info_centre/discussion_papers/GHGoffsets.pdf • World Bank Prototype Carbon Fund: http://carbonfinance.org/pcf/router.cfm?Page=DocLib&Dtype=4&ActionType=ListItems#Les5 • Dutch ERUPT Program: Dutch JI Program, Senter, http://www.senter.nl/asp/page.asp?alias=erupt&id=i001003#ERUPT/CERUPT • Dutch CERUPT Program: Implementation of the Clean Development Mechanism by The Netherlands, VROM, http://www2.minvrom.nl/docs/internationaal/CDM%20Implementation%20document%2029%20May%2003%20def_1.pdf and Dutch CDM Program, Senter http://www.senter.nl/asp/page.asp?id=i001236&alias=erupt# • CCX Chicago Climate Exchange Rulebook: http://www.chicagoclimateexchange.com/about/program.html J. Pershing, RGGI, May 2004