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The Value of Offsets in Oregon’s Load-Based Cap and Trade System. Carbon Allocation Task Force Presented by: Michael Ashford June 1, 2006. Agenda. Background on The Climate Trust Rationale for Offsets Policy Economic Offsets are an Established Policy Option Importance of Offset Quality

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the value of offsets in oregon s load based cap and trade system

The Value of Offsets in Oregon’s Load-Based Cap and Trade System

Carbon Allocation Task Force

Presented by: Michael Ashford

June 1, 2006

agenda
Agenda
  • Background on The Climate Trust
  • Rationale for Offsets
    • Policy
    • Economic
  • Offsets are an Established Policy Option
  • Importance of Offset Quality
  • Offsets Support the Oregon GHG Strategy’s Guiding Principles

2

the climate trust mission offsets the trust is a 501 c 3 non profit corporation
The Climate Trust Mission: OffsetsThe Trust is a 501(c)(3) Non-Profit Corporation

“The Climate Trust promotes climate change solutions by providing high quality greenhouse gas offset projects and advancing sound offset policy.”

3 Main Programs

  • Oregon Power Plant Offset Program
  • Greenhouse Gas Offset Partnership Program
  • Offset Policy Initiative

4

who is the climate trust independent buyer of ghg offsets
Who is The Climate Trust?Independent Buyer of GHG Offsets

Market Leader

  • One of the largest, most experienced offset buyers in US and world markets
  • Only state-recognized offset provider
    • Portfolio: 11 projects, $4.5 million, 1.7 million metric tons CO2
    • Pipeline: Placing $7 million more now

5

who is the climate trust promoting sound offset policy
Who is The Climate Trust?Promoting Sound Offset Policy

Offset Policy Resource

  • Contributing directly to viability and integration of offset policy at national, regional and state levels
    • RGGI, California, Massachusetts, Washington
    • USEPA, 1605(b), Senator Domenici & Bingaman Climate Change White Paper
  • Outreach and Communications
    • UNFCC Conference of Parties, International Emissions Trading Association, CarbonExpo, California Climate Action Registry, National Association of Regulatory Utility Commissioners

6

slide8

What is an Offset? (theory) Specific Project That Reduces GHG Levels

CO2 emissions

The baseline case

Baseline emissions

Offsets

Project emissions

The project case / monitoring & verification

years

Project begins

Project ends

8

truck stop electrification
Truck Stop Electrification

What is an Offset? (practice)Specific Project That Reduces GHG Levels

  • I-5 Corridor in OR and WA
  • “Shutting-down-and-plugging-in” shifts from diesel idling to lower carbon grid electricity
  • 90,000 metric tons CO2
  • Saving estimated 10 million gallons of diesel fuel
  • Emissions co-benefits:
    • 1,400 tons of nitrogen oxides (NOx), 40 tons of particulate matter (PM)
  • 16 year contract

9

policy rationale for offsets more money for other priorities
Policy Rationale for OffsetsMore Money for Other Priorities
  • Effective in reducing GHG levels
  • Lower climate change mitigation cost to society
  • Funding driver
    • into un-capped sectors
    • into new & innovative technology
  • Economic co-benefits
    • Create jobs; save money on energy; enhance energy security by reducing oil imports; create demand for clean energy products.
  • Environmental co-benefits
    • Reduce air pollution; preserve biodiversity; improve habitat, watersheds, and water quality; reduce soil erosion; protect endangered species

10

economic rationale for offsets estimated ranges for mitigation costs
Economic Rationale for OffsetsEstimated Ranges for Mitigation Costs

Illustrative GHG mitigation prices

  • US Offsets (Climate Trust) $4 - $7/ton
  • Kyoto CDM offsets $9 - $12/ton
  • Allowances in Europe $~25+/ton
  • Efficiency* $15 - $40/ton
  • Wind Green Tags ($10/mWh) $~15/ton
  • Geo-Sequestration More

*Cost to utility for mitigation in conventional coal plant

11

economic rationale for offsets power of the market
Economic Rationale for OffsetsPower of the Market
  • “Offsets specifically expand the scope of the program and serve to unleash the power of the market to stimulate innovation and cost-effectively reduce emissions.”
    • Pew Center on Global Climate Change*
  • “Offsets help protect the market against price volatility and … reduce the transaction costs of the emissions trading market by increasing market liquidity.”
    • The Nature Conservancy*

*Senators Domenici & Bingaman White Paper

12

why are offsets important

*

Why are Offsets Important?

“Cap and Trade” Logic: The gains of trade

$10

Will buy at $9 and save $1

$8

Will sell at $9 and make $1

Marginal cost of GHG reduction for given “market”

Offset Innovation: Capturing Further Efficiencies

Will buy at $5 and save $5

$10

Will buy at $5 and save $3

$8

$5

Will sell at $5 and make $5

Marginal cost of GHG reduction with offsets

13

*Prices are for illustrative purposes only

offsets fill a crucial need now critical to transition to lower carbon economy
Offsets Fill a Crucial Need: NowCritical to Transition to Lower Carbon Economy
  • Bridge the Technology Gap
    • Cheap Coal; IGCC; Geological sequestration
    • Pew Center for Global Climate Change: “[I]t will take decades to transition capital stock of power generating plants to low carbon sources, so there is a critical need for offsets as a way of cutting net emissions affordably in the short and medium term.”*
  • “Fundamental Principle” of GHG Policy
    • “… [All sectors should be required to contribute to the climate solution, whether they participate as capped sectors or as offsets. The rationale for this is that climate change is such a large problem that all sectors should be asked to be part of the solution even source that are designated as offsets.” – Center for Clean Air Policy*

*Senators Domenici & Bingaman White Paper

14

where are offsets traded now
Where are Offsets Traded Now?
  • Kyoto Protocol
    • Joint Implementation, Clean Development Mechanism
  • EU Emissions Trading Scheme
  • New South Wales
  • Voluntary Markets
    • PG&E, Ford, British Airways, Nike
    • Climate Trust, CCX

16

offsets in state policy
Offsets in State Policy
  • Oregon CO2 Standard
  • Washington Standard
  • Massachusetts Standard
  • California
    • “The focus [in Oregon and Washington] is to ensure high-quality, cost-effective offsets that provide a permanent and viable nexus between those responsible for climate change emissions and the currently available solutions to reduce and eliminate those emissions over time. A program similar to the Climate Trust program should be considered for California.”
      • Climate Change Action Team Report to the Governor (March 2006)

17

offsets in regional policy
Offsets in Regional Policy
  • Regional Greenhouse Gas Initiative
    • 50% of required reductions can be offsets
  • “[T]he RGGI offsets component is a flexibility mechanism that provides a measure of insurance against high allowance prices. By allowing a wider range of technical options outside the electric power sector to be used to achieve emissions reductions, compliance costs will be lowered.”
    • RGGI Staff Working Group Evaluation of Offsets Supply and Potential Demand

18

offsets in federal policy
Offsets in Federal Policy
  • Senator Domenici and Bingaman White Paper
    • Extensive discussion of offsets
    • Offset Pilot Program
  • McCain-Lieberman Climate Stewardship Act
    • 15% of required reductions can be from offsets
  • Senator Feinstein’s Strong Economy and Climate Protection Act
    • Substantial offset provisions, particularly in the agricultural sector

19

quality projects selection criteria rigorous internal and external review process
Quality Projects: Selection CriteriaRigorous Internal and External Review Process
  • Primary selection factors
    • Additionality
    • Cost effectiveness: $/metric ton of GHG benefit
    • Reliability of technology
    • Reliability of project partner
  • Other project selection factors include:
    • Monitoring & verification - Replicability
    • Permanence - Expandability
    • Guarantees - Portfolio diversity
    • Location of project - Co-benefits
quality projects additionality projects must create new emissions benefits
Quality Projects: Additionality Projects Must Create New Emissions Benefits
  • Mitigation measures that would not occur without offset project funding
    • Excludes common practice, regulated activities
    • Money making projects eligible, if other barriers
  • Types of barriers offset funding overcomes
    • Limited or no access to capital
    • Investment hurdle rate
    • No economic return
    • High perceived risks
    • Resource availability
    • Infrastructure

22

quality projects quantification experts prepare baseline studies and m v plan
Quality Projects: Quantification Experts Prepare Baseline Studies and M&V Plan
  • Baseline study
    • Build in expected changes from business as usual
  • Monitoring & Verification Plan
    • Measurement technique
    • Periodic measurement
    • 3rd party verification
    • Funding plan
      • Escrow to ensure sufficient M&V funding
  • Results used in contracts to verify delivery

24

ensuring quality mitigating risk top priority for the climate trust
Ensuring Quality & Mitigating RiskTop Priority for The Climate Trust
  • Due diligence during project review
    • Technology and its offset attributes
    • Offset provider
  • Portfolio diversity mitigates risk
  • Structuring our contracts to mitigate risk
    • Preserving our capital
    • Reducing the risk of underperformance
    • Defining the ownership of offsets

25

preserving offset fund capital capital preservation is a fiduciary responsibility
Preserving Offset Fund Capital Capital Preservation is a Fiduciary Responsibility
  • Pay after the event creating the offsets
    • Pay for verified tons as they occur
    • Pay for program installation of measures
    • Pay upon commercial operation (Engineer’s or 3rd party certification)
    • Conditions precedent to closing (Rely on senior lenders)
    • Security interest in project equipment

25

reducing underperformance risk ensuring we get tons after we pay our money
Reducing Underperformance RiskEnsuring We Get Tons After We Pay Our Money
  • Most contracts include delivery guarantees
    • Full or partial guarantee of quantity of tons
  • Takes several forms
    • Replace tons if a shortfall occurs
      • On power generating projects where we pay upon commercial operation, we require a guarantee of the anticipated quantity of tons
    • Give money back
    • Program offsets include performance milestones; Trust can de-obligate
  • Active role in managing our offset contracts
    • Define remedies for underperformance based on regular reporting

26

defining the ownership of offsets establishing legal basis for a new commodity
Defining the Ownership of OffsetsEstablishing Legal Basis for a New Commodity
  • Extensive legal definitions regarding offsets
  • Developer transfers any and all rights to CO2 reductions
    • Bill of Sale
    • Annual Offset Certificate
    • Third party verification of the quantity of offsets delivered
  • Programmatic offsets: Participation agreements create a clear ownership trail to tons of CO2

27

avoiding double counting critical to environmental integrity
Avoiding Double CountingCritical to Environmental Integrity
  • Seller exclusions:
    • Seller can’t sell the same tons to another entity
    • Seller can’t use the tons for other purposes
    • No sale of CO2 in environmental products
      • E.g., Green Tags
  • Disclosures and disclaimers:
    • Written disclaimers from all partners & participants
    • Disclose sale to regulatory authorities & others
    • Define what “bragging rights” are OK

28

science based effective reductions
Science-Based & Effective Reductions
  • Principle A: Oregon’s reduction goals and solutions should be firmly grounded in science and lead to effective GHG reductions
    • Offsets yield real emissions reductions based on rigorous monitoring and third party verification.

31

cost effectiveness
Cost-Effectiveness
  • Principle B: The Task Force shall begin with the most cost-effective solutions first.
    • Offsets direct funding towards the lowest-cost mitigation source.
      • Utilized only when they are more cost-effective than other means.
    • Flexibility afforded by offsets will help the load serving entities meet their emissions reduction targets most efficiently and most cost-effectively.

32

offsets especially relevant in a two player market
Offsets Especially Relevant in a ‘Two-Player’ Market
  • Oregon:
    • Two capped entities with large carbon footprints and several smaller entities with small footprints
    • Placeholder: Price cap of $40/ton
  • Without offsets:
    • Trading more prone to gaming and likely to occur close to the price cap
  • With offsets:
    • Offset price is another price point in the mix
    • Capped entity has alternative, (lower) cost option
    • Drive down overall cost of program

33

two player market
‘Two-Player’ Market

Cap and Trade: No offsets

$30

Will buy at $30 or less

$15

Will sell at $16 or more

Transactions may move towards highest marginal cost

Cap and Trade ‘Plus’: Offsets offer alternative price

Will buy at $30 or less

$30

Will sell at $16 or more

$15

$10

Will sell $10 or more

Transactions more likely to move to lower marginal cost

34

economic development innovation
Economic Development & Innovation
  • Principles C, E & G: High level of emphasis on economic development and long-term economic well-being of Oregon economy.
  • Oregon can use the transition to clean energy as an engine for economic development.
    • Offsets encourage development by driving funding to technologies that reduce GHG emissions.
    • Utilize agricultural sector and rural assets
  • Capitalize on Oregon’s unique leadership
    • Climate Trust, Bonneville Environmental Foundation, Energy Trust of Oregon

35

equity
Equity
  • Principle J: Addresses equitable allocation of costs and benefits when implementing the Strategy.
    • Offsets essentially transfer money from those causing climate change to those feeling its effects and those best equipped to immediately contribute to its solution.

36

conclusion
Conclusion
  • Offsets directly support the OR GHG Strategy’s Guiding Principles
  • OR should build on the millions of dollars successfully invested (and being invested) in offset projects
    • Another “Oregon First” for the policy arena
  • There is a strong independent rationale for offsets
    • policy & economic benefits
  • Offsets are a widely recognized and accepted
    • globally, nationally, regionally, and other states
  • Offset quality is driving acquisitions

37

thank you
Thank You

Michael Ashford

Deputy Director

The Climate Trust

(503) 238-1915

mashford@climatetrust.org

38