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Transcript of A Review of Offset Programs: Trading Systems, Funds, Protocols, Standards and Retailers
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A Review of Offset Programs: Trading Systems,Funds, Protocols, Standards and Retailers
Anja Kollmuss, Michael Lazarus,Carrie Lee and Clifford Polycarp
Research Report, Stockholm Environment Institute, 2008
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A Review of Offset Programs: Trading Systems,
Funds, Protocols, Standards and Retailers
Version 1.1* October 2008
Anja Kollmuss, Michael Lazarus, Carrie Lee and
Clifford Polycarp
* Version 1.0 of this report was prepared under contract to the Climate Change Division of the UnitedStates Environmental Protection Agency (68-W-06-010), under the guidance and support of Maurice
LeFranc, with management assistance by Heidi Nelson-Ries at Stratus Consulting, Inc. Version 1.1 is theSEI research report version, which contains some small editorial revisions.
The views and opinions expressed in this report are those of the authors. This report does not representthe views of the United States Government or of the US Environmental Protection Agency.
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Stockholm Environment InstituteKrftriket 2B106 91 StockholmSweden
Tel: +46 8 674 7070Fax: +46 8 674 7020E-mail: [email protected]
Web: www.sei.se
Publications Manager: Erik WillisWeb Manager: Howard CambridgeLayout: Richard Clay
Cover photo: R.Clay/SEI
This publication may be reproduced in whole or in part and in any formfor educational or non-profit purposes, without special permission fromthe copyright holder(s) provided acknowledgement of the source is made.No use of this publication may be made for resale or other commercialpurpose, without the written permission of the copyright holder(s).
Copyright November 2008 by Stockholm Environment Institute
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v
ContEntS
Acknowledgements vii
List of acronyms ix
1 Context and purpose of this review 1
2 Recent trends 4
3 A comparison of offset programs 6
3.1 General features of offset programs 7
3.2 Market size and scope 12
3.3 Offset project eligibility 19
3.4 Additionality and quantification procedures 27
3.5 Program administration and authority 33
4 International offset mechanisms 38
4.1 Clean Development Mechanism (CDM) 42
4.2 Joint Implementation (JI) 57
5 Mandatory cap and trade systems (offset features) 66
5.1 Australian Carbon Pollution Abatement Scheme 66
5.2 Canadas Offset System for Greenhouse Gases 69
5.3 New South Wales Greenhouse Gas Reduction Scheme 74
5.4 Regional Greenhouse Gas Initiative 82
5.5 Western Climate Initiative 88
6 Other mandatory systems (offset features) 92
6.1 Alberta-Based Offset Credit System 92
6.2 State Power Plant Rules of Oregon, Washington and Massachusetts 98
7 Carbon offset funds 107
7.1 World Bank Carbon Finance Funds 107
8 Voluntary cap and trade systems (offset features) 114
8.1 Chicago Climate Exchange 114
9 Voluntary GHG reduction programs 120
9.1 Climate Leaders 120
9.2 California Climate Action Registry 124
10 Voluntary GHG accounting protocols (entity-wide and offsetproject specific) 131
10.1 WBCSD/WRI GHG protocol for project accounting 131
10.2 ISO 14064 135
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11 Voluntary standards for offset projects 140
11.1 Gold Standard 141
11.2 Voluntary Offset Standard 149
11.3 Voluntary Carbon Standard 2007 15211.4 Green-e Climate Protocol For Renewable Energy 161
11.5 Green-e Climate program 167
12 Offset retailers 176
12.1 The Climate Trust 176
12.2 TerraPass 181
12.3 NativeEnergy 184
12.4 Myclimate 187
General references 191
Glossary 194
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ACknowlEdgEmEntS
The authors greatly appreciate the time taken by the many individuals listed below for
their clarications and enrichment of specic report sections, and for their suggestionsthat improved the overall organization and framing of this document. The authors
extend particular thanks to Derik Broekhoff of the World Resources Institute, whoseunpublished survey of standards and programs, conducted with support from theWorld Economic Forum, provided a helpful guidepost for this effort. We acknowledgethe World Wildlife Fund for their support of earlier research, which helped to build astrong foundation for this report.
Edwin Aalders, the Voluntary CarbonStandard
Tom Arnold, TerrapassMartina Bosi, the World Bank CarbonFinance Unit
Derik Broekhoff , the World ResourcesInstitute
Meinrad Buerer, the Gold StandardPhil Carver, the Oregon Department ofEnergy
Nathan Clark, the Chicago ClimateExchange
James Colman, the MassachusettsDepartment of Environmental
Protection
Nathalie Dault, the EuropeanCommission, DG EnvironmentAllen Fiksdal, the Washington EnergyFacility Site Evaluation CouncilRob Fowler, Abatement Solutions Asia Pacic
Gary Gero, the California ClimateAction Registry
Josh Harris, the Voluntary CarbonStandard
Olivia Hartridge, Morgan StanleyJudith Hull, Environment CanadaJasmine Hyman, the Gold StandardAlexia Kelly, the Climate TrustMark Kenber, the Voluntary CarbonStandard
Lars Kvale, the Center for ResourceSolutions
Maurice LeFranc, the USEnvironmental Protection Agency
Suzanne Loney, Environment CanadaDamien Meadows, the European
Commission, DG EnvironmentShahyar Niakan, the World BankCarbon Finance UnitManuel Oliva, Climate Leaders, the USEnvironmental Protection Agency
Andy Ridge, Alberta EnvironmentRobert Savage, Alberta EnvironmentMichael Schlup, the Gold StandardKai-Uwe Barani Schmidt, the UNFCCCCDM SecretariatChris Sherry, New Jersey Department ofEnvironmental Protection
William Space, the MassachusettsDepartment of Environmental
Protection
Caitlin Sparks, the Gold StandardMartin Stadelmann, myclimateAdam Stern, TerraPassTom Stoddard, Native Energy
Scott Subler, the Chicago ClimateExchange
Jim Sullivan, Climate Leaders, USEnvironmental Protection Agency
Matthew Tidwell, the Climate TrustRich Wong, Pembina InstituteThe World Bank Carbon Finance UnitsOperations Team
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viii
lISt of ACronymS
AAU Assigned Amount Unit (Kyoto Protocol)
ACP Abatement Certicate ProvidersACT Australian Capital TerritoryAIE Accredited Independent Entity
BER Baseline Emission Rate
CCAR California Climate Action RegistryCCEMA Climate Change and Emissions Management ActCCX Chicago Climate ExchangeCDM Clean Development MechanismCDM EB CDM Executive BoardCER Certied Emission Reduction
tCER temporary CERslCER long-term CERsCFI Carbon Financial InstrumentCFL Compact Fluorescent LampCHF Swiss FrancCMAC Climate Marketers Advisory CommitteeCRS Center for Resources SolutionsCO
2Carbon dioxide
CO2e Carbon dioxide equivalent
COUP Intertribal Council on Utility PolicyDFP Designated Focal Point
DOE Designated Operational EntityDNA Designated National Authority
EIA Environmental Impact Assessment
EIT Economy in Transition (e.g. Eastern Europe)
ERU Emission Reduction Unit
EUA EU ETS allowance
EU ETS European Union Emissions Trading System
EPA US Environmental Protection Agency
ERPA Emissions Reduction Purchase AgreementFPO Forward Purchasing of OffsetsGHG Greenhouse GasGreen-e CPRE Green-e Climate Protocol for Renewable EnergyGS Gold StandardGS TAC Gold Standard Technical Advisory CommitteeGWh Gigawatt hourGWP Global warming potentialIETA International Emissions Trading Association
ICRD Independent Competition and Regulatory Commission
INCIS International Carbon Investors and ServicesIPART Independent Pricing and Regulatory Tribunal
IRP Integrated Resource Planning
ITL International Transaction Log
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JI Joint Implementation
JISC JI Supervisory CommitteeLDC Least Developed Countries
LULUCF Land use, land-use change and forestryMW Megawatt
MmtCO2e Million metric tons of CO
2equivalent
MstCO2e Million short tons of CO
2equivalent
NEM National Electricity Market
NSW GGAS New South Wales Greenhouse Gas Abatement Scheme NGAC NSW GHG Abatement CerticatesODS Ozone Depleting SubstancePDD Project Design Document
PSEG Public Service Enterprise Group
PV PhotovoltaicREC Renewable Energy CreditRGGI Regional Greenhouse Gas InitiativeRMU Removal Unit
RPS Renewable Portfolio Standard
SF6
Sulfur HexauorideSSCWG Small Scale Working GroupSTI Sustainable Travel International
TCG The Climate GroupUNDP United Nations Development Program
UNFCCC United Nations Framework Convention on Climate ChangeVCS Voluntary Carbon StandardVCS AFOLU VCS Agriculture, Forestry and Other Land UseVCU Voluntary Carbon UnitVOS Voluntary Offset StandardVER Veried Emission ReductionVERR Veried Emission Reduction/RemovalWBCSD World Business Council for Sustainable DevelopmentWEF World Economic Forum Global Greenhouse Register
WCI Western Climate InitiativeWRI World Resources Institute
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1 ContExt And PurPoSE of thIS rEvIEw
Carbon or greenhouse gas (GHG) offsets have long been promoted as an important
element of a comprehensive climate policy approach. By virtue of enablingemission reductions to occur where costs may be lower, offset projects and programscan reduce the overall cost of achieving a given emission goal, a nding supported by many economic analyses.1 Furthermore, offsets have the potential to deliversustainability co-benets, spurred through technology development and transfer, andto develop human and institutional capacity for reducing emissions in sectors and
locations not included in a cap and trade or a mandatory government policy.
With increasing attention on tackling the challenge of climate change, it is no surprisethat interest in carbon offsets is blossoming. Increasingly, individuals, organizations,and policymakers are considering carbon offsets to be a key element in their strategies
to address GHG emissions.
As experience with offset markets grows, however, a number of risks have becomemore widely apparent and caught the attention of the mainstream media.2 Most
fundamentally, offsets can pose a risk to the environmental integrity of climate actions,especially if issues surrounding additionality, permanence, leakage, quantication andverication are not adequately addressed. Depending on how offsets are used, theymay delay investment and innovation in lower-emitting technologies in key sources
and sectors of the economy (e.g. those covered by a cap and trade). They may provide
desirable near-term cost advantages, but at the risk of locking-in higher emissionsinfrastructures and higher costs in the longer term. Where the cost of implementing
offset projects is signicantly lower than the market price of offsets, as is the case formany non-carbon dioxide (CO
2) types of project (e.g. HCFC destruction projects),
offsets may be a more costly way than other mechanisms, such as direct incentives orregulation, of achieving the same reductions.
The challenge for policymakers is clear: to design offset programs and policies that
can maximize their potential benets while minimizing their potential downside risks.
Given the number and complexity of offset issues and interactions, this challenge isconsiderable.
A logical place to start is by reviewing experience with existing offset programs. Apart
from a few reviews of the voluntary carbon market (Hamilton, 2006; Trexler, 2007;Kollmuss et al., 2008), there is a general lack of publicly available reports that compileand compare the key features of the broad array of mandatory and voluntary offset
programs. Much of the available literature on offsets focuses on individual programs
or on specic aspects of the offset market, such as economic impacts, accounting
1 See e.g., EPA, 2008. Analysis of Senate Bill S.2191 in the 110th Congress, the Lieberman-WarnerClimate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf.
2 Gerald Wynn, Buyer Beware: Carbon Cuts not Always Real. Reuters, May 2 2007; and Ben Elgin,Another Inconvenient Truth. Business Week. March 26 2007.
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protocols and co-benets.3 Numerous leading actors in offset markets interviewed forthis report concurred that such a general review or resource is both currently lacking
and much needed. To ll this gap, we have designed a systematic and ongoing reviewof domestic and international offset programs. Our intended audience includes partiesinterested and involved in the development of mandatory compliance systems and of
voluntary offset programs and standards. The goal of this review is to provide an up-
to-date analysis and synthesis of the most inuential offset programs and activities,to reect on lessons learned, and thus to inform participants and designers of currentand future offset programs. Our intention is to periodically update this review tostay abreast of ongoing developments, and to develop a website portal to make thisinformation more accessible.
3 The World Banks annualState of the Carbon Market series (Capoor and Ambrosi, 2008) provides anexcellent, albeit summary, review of the broad trends and figures in the carbon market generally, and theoffsets market specifically. Some proprietary publications, such as Point Carbon, provide ongoing assess-ments of offset market activities.
Note to readers
As you review the material in this report, bear in mind that:
Reference citations are provided in two locations . Each programreview includes a reference section, which includes program-specificreferences, program websites and details of personal communications.Published documents that are cited throughout the report are included inthe reference list at the end of the document.
Program reviews are organized by program type. However, the orderof program reviews within each program type (e.g. Mandatory Cap andTrade Systems) has no implications.
Some program reviews contain more limited discussion of the les-sons learned. It is our aim to provide a consistent level of detail and
information across all program reviews; however, this is challenged by theimbalance in the published literature in favor of a select number of offsetprograms as well as the fact that experience and attention is concentratedin a handful of programs. This is especially the case for the Clean Devel-opment Mechanism (CDM), which as the most mature and dominant offsetprogram operating in the carbon market has been reviewed by many morepublications than any other program. This is reflected in the CDM programreview in this report, which has a more in-depth lessons learned sectionthan exists for any of the other programs.
Project portfolio data is limited. In this version, information on the types
and volume of projects approved or in the project pipeline is presentedonly for the CDM, Joint Implementation (JI) and the New South WalesGreenhouse Gas Reduction Scheme (NSW GGAS) programs. In futuredrafts, where information is available, we plan to provide similar tables ineach program review.
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Future versions of this review may also aim to report more extensively on lessons
learned and on the perceived strengths and weaknesses of offset program designs.
They may also include a wider array of offset programs and activities. This initial
version targets programs that meet one or more of the following criteria:
a signicant volume of credit transactions occurring or anticipated;
an established set of rules or protocols; and
path-breaking, novel or otherwise notable initiatives or important lessonslearned.
Comments and suggestions on this review, as well as on directions for potential future
versions, are encouraged and should be directed to: [email protected].
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2 rECEnt trEndS
The landscape of domestic and international project-based emission reduction or
offset programs is evolving rapidly. In 2007, the value of transactions in theglobal market for primary project-based emission reductions grew by 34% over
2006 levels to USD 8.2 billion (Capoor and Ambrosi, 2008). The market continuesto be dominated by the main offset mechanisms of the Kyoto Protocol: the CleanDevelopment Mechanism (CDM) and Joint Implementation (JI) . In 2007, the CDMaccounted for 87% of project-based transaction volumes and JI transactions doubledin volume and tripled in value over 2006 levels. European and Japanese entities werethe major buyers. The remaining market activity was split among other compliance
mechanisms and voluntary purchases (Capoor and Ambrosi, 2008). While theseprograms and players are likely to continue to dominate the global offset market for
some time, recent developments suggest that this pattern may be starting to shift,particularly in North America.
In July 2007, Alberta launched an offset system for its regulated large greenhouse gas(GHG) emitters, and in March 2008 the Canadian government launched its designfor a federal offset program. In the US, at least three states (Oregon, Washington andMassachusetts) have adopted power plant carbon dioxide (CO
2) emission requirements
that allow compliance through offsets.
The eastern states Regional Greenhouse Gas Initiative (RGGI) formally begins inJanuary 2009, and will be North Americas rst regional GHG cap and trade market.It will cover CO
2emissions from power plants in 10 northeastern US states. The
rst auction of allowances was held in September 2008. It was generally viewed asa success and allowances sold at prices above the auction reserve price. The RGGIhas established its own offset program, with highly standardized protocols for sixcategories of regional projects. It has also crafted a unique offset limit, which increasesand expands eligibility to offsets outside the region as allowance prices rise.
Also in September 2008, the Western Climate Initiative (WCI) released its design
recommendations for a regional emission trading system. Comprising seven US statesand four Canadian provinces, the WCI has a regional goal of reducing emissionsto 15% below 2005 levels by 2020. It will have the broadest coverage of any capand trade system to date, covering 90% of regional emissions by encompassing theresidential, commercial, industrial and transportation sectors in addition to electricity.It is scheduled to begin operation in January 2012, and will allow offsets to be used forup to 49% of emission reductions.
The voluntary offset market, which is targeting companies and individuals, is alsopoised for rapid expansion. Some predict that the voluntary market could rival todays
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CDM market within ve years, with over half of this activity in the US (Trexler, 2007and ICF International, 2006, as cited in Broekhoff, 2007). At the same time, the lackof common rules, transparent procedures and overall rigor in the voluntary market has
led to increasing concerns about the credibility of the offset market.
The Voluntary Carbon Standard (VCS) was launched at the end of 2007. The VCS isa base-quality voluntary offset standard that aims to unify the voluntary market andprovide basic quality assurances. The standard has very broad industry support. It willbe interesting to see if the VCS will become the main standard in the US and if it will tosome extent replace the Chicago Climate Exchange (CCX) and Green-e as voluntaryemission reduction (VER) standard providers.
Many observers think it increasingly likely that Federal legislation authorizing a
national US cap and trade system could be signed by 2010, given the support expressedfor such legislation by the incoming US President Barak Obama. Most of the climatepolicy bills submitted during the current session of Congress contained provisionsfor offsets under a cap and trade system. The most prominent of them, the AmericasClimate Security Act (the Lieberman-Warner bill), would have allowed for the useof domestic offsets to meet up to 15% of the overall emissions cap, and the use ofinternational allowances or offsets for another 15%. Such legislation could create a
market for domestic offsets in the US alone worth USD 10 to USD 20 billion per yearby 2020.4
Finally, the Bali Action Plan adopted in December 2007at the conference of the partiesto the United Nations Framework Convention on Climate Change (UNFCCC) hasincreased expectation that emission trading, and the CDM in particular, will continueto play a key role in any post-2012 international agreement (Point Carbon, 2008).
4 This is a rough estimate based on estimates of allowance prices using modeling of an early version ofthe bill by the Nicholas Institute, assuming that offsets trade for close to the estimated allowance price for2020 (USD 23/tCO
2in USD at 2005 prices), and that the allowed emissions by covered sources is roughly
5 billion tCO2e. USD 20/tCO
2times 15% times 5 billion tons equals USD 15 billion.
http://www.nicholas.duke.edu/institute/econsummary.pdf
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3 A ComPArISon of offSEt ProgrAmS
Rising concern over the threat of climate change has led to an expanding number of
mandatory and voluntary greenhouse gas (GHG) emission reduction programs andactivities, of which offsets are a common feature.
Every mandatory GHG emission trading system to date has allowed for the use of offsets by regulated entities to meet their compliance obligations. Mandatory compliance
regimes such as the Kyoto Protocol, the European Union Emission Trading Scheme(EU ETS) and, to a lesser extent, regional programs in Australia, the US and Canadahave been the principal drivers in the creation of project-based emission reduction
offsets. These regimes and programs are responsible for well over 90% of the nancialtransactions and offsets generated to date. Most of the transactions and offsets have
been generated from projects in developing countries through the Clean DevelopmentMechanism (CDM).
The design features of, and the experience and lessons learned from, the CDM arethus of central importance to participants in and designers of current and future offset
programs. Although dominant, however, the CDM is far from the only programto learn from. This report reviews the key design elements and experience of over
25 major programs and efforts to create and guide offset markets across the world:
mandatory compliance programs that drive the demand for offsets; offset creationand certication programs designed for this mandatory compliance market such asthe CDM and Joint Implementation (JI); voluntary compliance and emission tradingprograms such as Climate Leaders and the Chicago Climate Exchange (CCX); offsetproviders and funds; and offset standards and protocols such as the Voluntary CarbonStandard (VCS). As is noted above, this report aims to be relatively comprehensive inits coverage of the mandatory compliance market for GHG offsets and as up to dateas possible with respect to offset standards and protocols, but it covers only selectedoffset providers and funds because the voluntary market is vast and changes rapidly.
This section is a summary comparison of the key features of the programs reviewed in
detail in the main body of the report. Five tables compare the programs key featuresand help the reader to assess how they differ in terms of market size and scope, projecteligibility, additionality and quantication procedures, and project approval processes(program administration and authority).5 Each table is introduced with a brief overview
and comments on some of the key features. The tables list mandatory systems rst,followed by voluntary programs and retailers.
The four offset retailers were chosen to illustrate the services provided by voluntary
offset providers. Voluntary offset providers, aggregators and funds provide a varietyof services to individuals and organizations, including sourcing, aggregation (portfolio
creation) and quality assurance of offsets for individuals and business seeking to meet
5 This review and comparison builds on unpublished work prepared by Derik Broekhoff of the WorldResources Institute, which was funded by the World Economic Forum.
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their own goals and objectives. Several of these programs have been operating for over
a decade the Climate Trust, for example, was established to assist with compliancewith Oregons power plant emission regulations in 1997 but most of the offset
providers have entered the market much more recently.
There is now a little more than a decade of documented experience in offset program
design, and it is anticipated that there will be an expanding role for offsets in the designof future climate mitigation policy. Thus, the compilation of lessons learned in thisreport is a valuable opportunity to inform future offset program developments.
3.1 General features of offset programs
Table 3.1 summarizes the nature and regional scope of the selected offset programs and
gives their start dates.
Mandatory systemsMandatory systems require regulated emission sources, by national, regional orprovincial law, to achieve compliance with GHG emission reduction requirements.Offsets serve as an alternative compliance mechanism that emission sources can use tomeet these requirements. In most cases, these sources are regulated under cap and tradeemission trading regimes, such as the Regional Greenhouse Gas Initiative (RGGI) orthe EU ETS.
The two international mandatory project-based offset mechanisms established under
the Kyoto Protocol, the CDM and JI, were established in 2001 and began issuingregistered offsets in 2005. The participants in the EU ETS, the governments of theEU member states, the Japanese government and industry are the principal buyers ofCDM and JI offsets. The remaining mandatory programs that use offsets are located inNorth America and Australia. Many of these programs only recently got underway or
are still under development. A notable exception is the New South Wales GreenhouseGas Abatement Scheme (NSW GGAS), which has operated since 2003.
Voluntary systemsThe voluntary offset market includes a wide range of programs, entities, standardsand protocols. Voluntary emission reduction programs such as Climate Leaders andthe CCX set participating entities emission targets, which can partly be met throughoffsets certied through their respective protocols.
Offsets generated through voluntary markets, known as Veried or Voluntary Emissionsreductions (VERs), have been promoted as an opportunity for experimentation andinnovation. They have the general advantage of lower transaction costs than offsets
generated for use in mandatory compliance programs. However, the lack of qualitycontrol and the resulting attention attracted by substandard offset credits in thevoluntary market have generated concern from the wider offset market.
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In response, carbon market actors along with key business and environmental interestshave launched several efforts to create standards and protocols to improve the qualityand credibility of voluntary offsets. These standards and protocols differ signicantly
in their goals and the services provided. At one end are complete standards that provide rules and administrative bodies for accounting, quantication, monitoring,verication, certication and, in some cases, registration of offsets. These fullerstandards, which include the Gold Standard and the VCS, among others, tend to buildon existing rules and procedures in compliance markets, most notably the CDM. Thesestandards are designed to provide offset providers with quality assurance certicationfor their products and offset consumers with greater transparency and condence in thecredibility and integrity of certied offsets.
At the other end are offset protocols which are more limited in scope, such as the
International Organization for Standardization (ISO) standard 14064 and the GHGProtocol for Project Accounting. Such protocols provide common denitions,accounting frameworks and quantication options that can be adopted or adapted byindividual offset programs or standards. In this sense, these protocols can be viewedas building blocks for standard and program development. For example, the VCS hasadopted ISO-14064 for its accounting procedures.
There are other institutions, standards, and criteria that provide a mix of services fordesigning, screening, certifying or registering offsets. The California Climate ActionRegistry (CCAR), which is increasing its focus on offsets, provides a project registryand has developed selected quantication protocols for selected project types. TheGreen-e Climate Program audits and certies carbon offset retailers and ensures thattheir marketing claims are truthful. Other standards, such as the Climate, Communityand Biodiversity Standards (not discussed here) provide design criteria to ensure
robust project design and, particularly in this case, local community and biodiversitybenets.
The proliferation of standards, protocols and other programs reects the signicantux and experimentation in todays voluntary offset market. Some consolidation of
standards is likely to occur in future years. At the same time, because of the differingobjectives of many voluntary market participants, especially with respect to the localimpacts and benets of offset projects, multiple standards and screens are likely toremain lasting features of the voluntary market.
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Table3.1:Generalfeaturesofoffsetprograms6
Nameofp
rogram
Re
gionalscope
Typeofprogram
Startofprogram
InternationalOffsetMechanisms
CleanDevelopmentMechanism(CDM)
International(coversallcountries
tha
thaveratifiedtheKyotoProtocol)
Project-basedoffsetmechanismunderthe
KyotoProtocol
Generalrulesestab
lishedin
2001,firstoffsetissuedin
2005
JointImplementation(JI)
An
nex-1partiestotheKyotoProtocol
Project-basedoffsetmechanismunderthe
KyotoProtocol
Generalrulesestab
lishedin
2001.
Mandatory
CapandTradeSystems(OffsetFeatures)
AustraliaN
ationalEmissionsTrading
System
Au
stralia
Underdevelopment.Nationalcap
andtrade
systemproposedwithoffsetsaspotential
compliancemechanism.
Designexpectedbyendof
2008.Startexpecte
dby2010.
CanadasO
ffsetSystemforGreenhouse
Gases
Ca
nada
Underdevelopment.Nationalem
ission
intensitytargetswithoffsetsaspro
posed
compliancemechanism
Rulesexpectedin2
008
NewSouth
WalesGreenhouseGas
Abatement
Scheme(NSW
GGAS)
NS
W,Australia
Statepercapita-basedcapandtrade
systemwithoffsetsasunlimitedco
mpliance
mechanism
StartedinJanuary2003
RegionalG
reenhouseGasInitiative
(RGGI)
No
rtheastUSstates:CT,DE,ME,
NH
,NJ,NY,VT,MA,RI,andMD
Regionalcapandtradewithoffse
tsaslimited
compliancemechanism
Startsin2009.
WesternClimateInitiative(WCI)
We
sternstates(AZ,CA,MT,NM,
OR,UT,andWA)andCanadian
provinces(BC,MB)
Underdevelopment.Regionalcap
andtrade
systemwithoffsetsaspotentialcompliance
mechanism
Startsin2012
6
Allsourc
esarecitedinthespecificprogramreviewsections.
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Nameofp
rogram
Re
gionalscope
Typeofprogram
Startofprogram
OtherMan
datorySystems(OffsetFeatures)
AlbertaOffsetSystem
Ca
nadianprovinceofAlberta
Provincialintensity-basedemissionregulations
allowforunlimitedoffsetsasaco
mpliance
option
StartedinJuly2007
Statepowerplantrules(OR,WA,MA)
Oregon
Wa
shington
Ma
ssachusetts
OR/WA:Legislatedemissionstandard
MA:Statecapwithoffsetsaslimited
compliancemechanism
OR:Startedin1997
WA:Startedin200
3
MA:Startedin200
6
CarbonFin
anceFunds
WorldBankCarbonFinanceFunds
International
OffsetFund
Establishedin1999
VoluntaryC
apandTradeSystems(OffsetFeatu
res)
ChicagoClimateExchange(CCX)
OriginallyonlyintheUSbuthas
beenexpanded.International
me
mbershipnowpossible.
Voluntarycompliancecapandtra
dewith
offsetsasunlimitedcompliancem
echanism
Launchedin2002
VoluntaryG
HGReductionPrograms
ClimateLeaders
PrimarilyUS
Voluntarycomplianceprogramwithoffsetsas
unlimitedcompliancemechanism.
Launchedin2002.
Offset
programunderdevelopment.
CaliforniaClimateActionRegistry
(CCAR)
US
(mainlyCalifornia)
GHGregistry
Activesince2002
VoluntaryG
HGAccountingProtocols
WBCSD/WRIGHGProtocolforProject
Accounting
No
tdefined
Offsetstandardprotocol
Publishedin2005
ISO14064
No
tdefined
Voluntaryprotocolandprojectsta
ndard
Launchedin2006
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Nameofp
rogram
Re
gionalscope
Typeofprogram
Startofprogram
VoluntaryS
tandardsforOffsetProjectsandRetailers
GoldStand
ard(GS)
International
Carbonoffsetstandard
Launchedin2003
VoluntaryO
ffsetStandard(VOS)
International
Carbonoffsetscreen
Launchedin2007
VoluntaryC
arbonStandard2007(VCS
2007)
International
Offsetstandard
Launchedin2007.
Version1
launchedin2006.
Green-eClimateProtocolforRenewable
Energy
US
VoluntaryGHGprotocol
Launchedin2007
Green-eClimateProgram
US
focus/International
Voluntarycertificationprogram
Launchedin2007
VoluntaryO
ffsetRetailers
ClimateTru
st
US
Retail/BulkOffsetProvider
Foundedin1997
TerraPass
No
rthAmerica
RetailOffsetProvider
Foundedin2004
NativeEnergy
US
RetailOffsetProvider
Foundedin2000
Myclimate
International
RetailOffsetProvider
Establishedin2002
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3.2 Market size and scope
Offset markets are growing rapidly and increasing in signicance. From 2005 to 2007
alone, the transaction value of the global market for primary and secondary project-based emission reductions grew by 470% from USD 2.9 to USD 13.6 billion (Capoorand Ambrosi, 2007 and 2008).7 The market continues to be dominated by the mainoffset mechanisms of the Kyoto Protocol the CDM and the JI. In 2007, the CDMaccounted for 87% of project-based transaction volumes and JI transactions doubled involume and tripled in value over their 2006 levels, with European and Japanese entitiesas the major buyers. The remaining market activity split among other compliance
mechanisms and voluntary purchases (Capoor and Ambrosi, 2008).
The Executive Secretary of the United Nations Framework Convention on Climate
Change (UNFCCC), Yvo de Boer, has stated that the CDM could become a USD 100billion per year market.8 On the other hand, if and when project types, sectors andcountries become increasingly covered by emission caps or other regulations, themarket for offsets could begin to decline as allowance allocation and trading or other
policy instruments take on a greater role. Thus, the ultimate fate of the offset market isfar from clear. It will depend on the role policymakers assign to offsets in an efcient,equitable and effective policy regime that comprehensively addresses the climatechange challenge.
Table 3.2 compares the market size and the scope of various offset programs and
providers, to the extent that information could be compiled. Compiling estimates of thesize or volume of the offset market is challenging because metrics vary and information
is often proprietary, especially within the voluntary market. The different metrics canbe especially confusing. Some gures for offset market activity represent total offsettransactions in a given year, including both primary (by original offset providers) andsecondary (resold offsets) transactions, some are for primary transactions alone, whileothers represent the total offsets registered or certied (which may include expectedoffsets generated in future years) or issued during a given year. The resulting estimates
of the size of the CDM market can thus vary by as much as an order of magnitude.
For example, slightly over 100 million Certied Emission Reductions (CERs) havebeen issued to date, while other gures refer to the 1.2 to 2.6 billion CERs registeredand in the pipeline, that is, that could be issued cumulatively by 2012 if projectsregistered, and those under development, yield credits as expected. Readers shouldthus view market size estimates with caution, and with careful attention to preciselywhat is being counted.9
7 A primary transaction occurs between the original owner (or issuer) of the Carbon asset and a buyer(Capoor and Ambrosi, 2007). A secondary transaction occurs where the seller is not the original owner (orissuer) of the Carbon asset (Capoor and Ambrosi, 2007).
8 UNFCCC Press Release, September 19 2006
9 Those interested in more detailed and up-to-date assessments should consult market analyst publica-tions such as those produced by Point Carbon, New Carbon Finance and Ecosystem Marketplace; as wellas the annual State of the Carbon Market review published by the World Bank.
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Compliance (mandatory) marketsOnly offsets generated from the CDM and JI project-based mechanisms are eligiblefor compliance under the EU ETS and for compliance with the Kyoto Protocol, which
makes such offsets by far the largest component of the compliance offset market.Demand from the EU ETS, as the largest mandatory cap and trade system, hasdominated the purchasing of offsets in recent years. These account for almost 90% ofCDM and JI purchases to date. The Japanese government and private entities are theother signicant buyers (Capoor and Ambrosi, 2008).
Outside of the Kyoto Protocol instruments (the CDM and JI), the NSW GGAS is thesecond largest offset market. As of February 29 2008, nearly 63.3million metric tons(Mmt) oftCO
2e in offset credits had been created under the program (NSW GGAS,
2008).
Voluntary marketsEstimates of the size of the voluntary offset market vary widely and sales information
from retail offset providers can be difcult to track. According to Hamilton, during2006 voluntary offset market transactions totalled 23.7Mmt of CO
2e (see Figure
1.1). Transactions through the CCX account for 10.3MmtCO2e, and the remaining
13.4MmtCO2e was transacted through the voluntary offset providers, retailers and
purchasers surveyed by Hamilton et al. (2007). These values may be conservative because of the lack of complete reporting. On the other hand they may includesome double counting of offsets because they include surveys of both providers and
purchasers. Individuals, organizations and businesses in the US dominate voluntaryoffset purchases. Almost 60% of global voluntary offset market transactions werein the US in the rst three quarters of 2007, with transactions as part of the CCXaccounting for close to half of the US volume (Point Carbon, 2007c).
Offset pricesOffset prices tend to vary based on the project type, its location, the market demandand the stringency of the offset program requirements. Offset prices in the compliancemarket are driven primarily by the supply of and demand for offsets and allowances.
Demand drives prices for offsets. It is therefore not surprising that offsets for themandatory market fetch considerably higher prices than voluntary offsets.. This is
most apparent when comparing the price of CDM offset credits to those available onthe voluntary offset market, as is shown in Table 3.2.
These price estimates should be viewed with caution, since they represent only a briefsnapshot of an often volatile market. Nonetheless, they illustrate that prices vary byan order of magnitude depending on the program, its requirements and, perhaps mostimportantly, the markets in which the offsets are sold. For example, prices for CDMand JI offsets are linked to the broader markets for EU ETS and Kyoto allowances.
Depending on the extent to which delivery of CERs and emission reduction units(ERUs) is guaranteed, they can garner upwards of 80% of the trading price of EUallowances. Even though in principle CERs, ERUs, and EU allowances are fullyfungible, countries have supplementarity limits on the amount of CERs and ERUs
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they can purchase to meet their compliance obligation. To the extent that these limits
are expected to be binding, and thus that the supply of CERs and ERUs is expected toexceed allowable demand under the supplementarity limits, CERs and ERUs will trade
for prices lower than allowances. It is not clear whether this will occur in the periodto 2012.
Prices for voluntary offset credits vary signicantly based on the standards used,project types, project locations, offset quality, delivery guarantees and contract terms.Of the ve offset retailers reviewed in this report, the price per metric ton ranges fromUSD1112 for the US-based Climate Trust, TerraPass and NativeEnergy projects,up to USD 35 for the Gold Standard CERs and VERs sold through myclimate. Noclear connection has been found between the offset sale price of non-prot vs. for-prot retailers (Kollmuss and Bowell, 2007). No readily available metrics currentlyexist for consumers to determine either how the price of offset credits sold in the
voluntary market is determined, or the role the offset price has on the quality of theoffset purchased.
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Table3.2:Marketsizeandscope(estimatesasofJuly2008ormostrece
ntdateavailable)
Nameofp
rogram
Tradableunit
nameand
acronym
Participants/buyers
Unitof
measurement
ERstodate
(MmtCO2e)*
Projected
ERsby2012
(MmtCO2e)*
Indicativeprices
(USD/metr
ictonin
early2008
unless
noted)
InternationalOffsetMechanisms
CleanDevelopment
Mechanism
(CDM)
CertifiedEmissions
Reduction(CER
)
Publicandprivateentities
withinthejurisdictionof
KyotoProtocolmember
countries;otherentities
mayuse/retirethem
undervoluntaryoffset
programs
metric
170
12001400
CERsissued
Primaryma
rketUSD
23USD2
4(EUR
14.50-EUR15)
Secondarymarket:
USD35(EU
R22)
JointImplementation(JI)
Emissions
ReductionUnit
(ERU)
SameasCDM
metric
N/A
180280
N/A
Mandatory
CapandTradeSystems(OffsetFeatures)
AustraliaN
ational
EmissionsT
radingSystem
Under
development
Underdevelopment.
Expectedtobe
complianceentitiesinthe
nation
metric
n.d.
n.d.
n.d.
CanadasO
ffsetSystemfor
Greenhous
eGases
Under
development
Complianceentitiesinthe
nation
metric
n.d.
n.d.
n.d.
NewSouth
Wales
Greenhous
eGas
Abatement
Scheme(NSW
GGAS)
NSW
GHG
Abatement
Certificates
Complianceandelective
entitiesinthestate
metric
68
n.d.
USD4(Sep
t.2007)
RegionalG
reenhouseGas
Initiative(RGGI)
CO2Offset
Allowances
Complianceentitiesinthe
region
short
n.d.
n.d.
n.d.
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Nameofp
rogram
Tradableunit
nameand
acronym
Participants/buyers
Unitof
measurement
ERstodate
(MmtCO2e)*
Projected
ERsby2012
(MmtCO2e)*
Indicativeprices
(USD/metr
ictonin
early2008
unless
noted)
WesternClimateInitiative
(WCI)
Under
development
Underdevelopment.
Expectedtobe
complianceentitiesinthe
region
Notyetspecified
n.d.
n.d.
n.d.
OtherMan
datorySystems(OffsetFeatures)
AlbertaOffsetSystem
Alberta-based
offsetcredit
Complianceentitiesinthe
province
metric
1.5
n.d.
n.d.
Statepowerplantrules(OR,
WA,MA)
Oregon:CO2
offsets
Washington:
Carboncredits
Massachusetts:
GHGCredits
Complianceentitiesin
thestate
short
Oregon:1.5
n.d.
Oregon:USD1.40
Washington
:USD1.60
Massachusetts:USD5
CarbonFin
anceFunds
WorldBankCarbon
FinanceFunds
CERandERU
Governmentagencies
andprivatesector
companies
metric
6.9
300
n.d.
VoluntaryC
apandTradeSystems(OffsetFeatu
res)
ChicagoClimateExchange
(CCX)
CarbonFinancial
Investments(CF
I)#
CCXmembersandnon-
memberssuchasoffset
brokers
metric
44
n.d.
USD2-8
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Nameofp
rogram
Tradableunit
nameand
acronym
Participants/buyers
Unitof
measurement
ERstodate
(MmtCO2e)*
Projected
ERsby2012
(MmtCO2e)*
Indicativeprices
(USD/metr
ictonin
early2008
unless
noted)
VoluntaryG
HGReductionPrograms
ClimateLeaders
ExternalGHG
reductions
ClimateLeaderspartners
short
n.d.
n.d.
N/A
CaliforniaClimateAction
Registry(CCAR)
N/A
N/A
metric
N/A
N/A
N/A
VoluntaryG
HGAccountingProtocols
WBCSD/WRIGHGProtocol
forProjectAccounting
N/A
N/A
N/A
N/A
N/A
N/A
ISO14064
N/A
N/A
N/A
N/A
N/A
N/A
VoluntaryS
tandardsforOffsetProjectsandRetailers
GoldStand
ard(GS)
GSCERandGS
VER
Offsetretailers,providers,
individuals,organizations
andbusinesses
metric
0.7
n.d.
Averageprice
premium
GSVERs:20100%
abovecomparable
VERs
GSCERs:5
25%
aboveregularCERs
VoluntaryO
ffsetStandard
(VOS)
VerifiedEmissio
ns
Reduction(VER)
Largemultinational
financialinstitutions
metric
n.d.
n.d.
n.d.
VoluntaryC
arbonStandard
2007(VCS2007)
VoluntaryCarbon
Unit
Voluntaryoffset
retailersandproviders,
individuals,organizations
andbusinesses.
metric
n.d.
1020
USD824(VCS
version1)
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Nameofp
rogram
Tradableunit
nameand
acronym
Participants/buyers
Unitof
measurement
ERstodate
(MmtCO2e)*
Projected
ERsby2012
(MmtCO2e)*
Indicativeprices
(USD/metr
ictonin
early2008
unless
noted)
Green-eClimateProtocol
forRenewa
bleEnergy
VER
Offsetretailers,
individuals,organizations
andbusinesses
metric
n.d.
n.d.
n.d.
Green-eClimateProgram
VERandCER
Carbonoffsetretailers
(variesby
program
certified)
n.d.
n.d.
Variesbyoffsetretailer
VoluntaryO
ffsetRetailers
ClimateTru
st
VER
Individuals,organizations
andbusinesses
Complianceentitiesunder
theOregonstatepower
plantrule
metric
2.6
n.d.
USD12
TerraPass
VER
Individuals,organizations
andbusinesses
pounds
0.5
n.d.
USD13
NativeEnergy
VER
Individuals,organizations
andbusinesses
short
n.d.
n.d.
USD11
Myclimate
CERandVER
Individuals,organizations
andbusinesses
metric
0.1
n.d.
USD36-107
*Valuesinthesecolumnsareestimatesofcumulativ
eERsgenerated.Refertosectionfordiscussion.Estimatesmaynotbefullycomparable.
n.d.:Nodata
readilyavailable;N/A:notapplicable
Indicativepr
icesarefrom2008andaredrawnfromawiderangeofsources;pricesmay
fluctuatesignificantly,especiallythose
linkedtotradingmarkets.Pricesarer
oundedtothe
nearestUSdo
llar,andwherebasedoneurosreflect
anexchangerateofEUR1=USD1.54(http://www.federalreserve.gov/rele
ases/h10/update/accessedonMarch
212008)
#Unitsaredenominatedin100metrictonsofCO2
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3.3 Offset project eligibility
Table 3.3 shows offset eligibility requirements for each offset system or program. These
requirements reect the specic context and objectives of each system. Design featuresare commonly added to limit offset projects to a particular location or project type in
order to direct offset investments to favored regions, project types or technologies.Some offset programs and standards also include environmental and social objectives
as project eligibility criteria.
In general, offset programs tend to focus on either encouraging regional investmentor supporting sustainable development and providing nancial ows to developingeconomies. While sustainable development and technology transfer to developing
countries was an explicit design goal of the CDM and the Kyoto Protocol, many of theregional and provincial mandatory compliance programs outside the Kyoto Protocol
prefer to maintain benets and build support through investment in local or regionalcommunities and enterprises.
Project locationTable 3.3 shows the eligible project locations but not the distribution of offset project
activities to date under each program. The distribution of project locations and project
types reects not only where market opportunities lie (e.g. the supply of low-costemission reductions), but also the capacity of national and local institutions to engagein the offset market, as well as the transaction costs and other barrier they may face.For instance, in the CDM over 73% of offset project transactions in 2007 were forprojects located in China, but only 6% in India, 11% in Latin America, 5% in Africaand 5% in the rest of Asia (Capoor and Ambrosi, 2008). China possesses abundantlow-cost opportunities to reduce the emission of so-called high global warming impact
industrial gas, in particular HFC-23 and N20 produced as the unwanted by-products
of refrigerant and chemical manufacturing, respectively. As is illustrated in Figure 3.1,industrial gas projects represented nearly half of the CDM offsets sold in 2006. Chinaalso has an increasingly well-developed infrastructure for developing and approving
offset projects.
In the voluntary market, 39% of all offsets sold in 2007 originated from projects locatedin Asia and 27% from projects located in North America (Hamilton, 2008).
Issues with Renewable Energy Credits
In the voluntary carbon offset market, Renewable Energy Credits (RECs),generated through the production of renewable energy, are increasingly beingconverted to and sold as carbon-offset equivalents. This practice has beenhighly controversial because of concerns raised regarding the additionality
and ownership of converted RECs (Gillenwater, 2007.) For further discussionon the use of RECs see section 10.6 section 11.4.
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Figure 3.1: Offset project types and transaction volumes in 2006
(Sce: Cap a Absi, 2007; hai, 2007)
Kyoto Projects (CDM and JI)
Total Volume in 2006: 466 MmtCO2e
Voluntary Offset Projects (CDM and JI)
Total Volume in 2006: 13 MmtCO2e (Excluding CCX transactions of 10.3 MmtCO
2e)
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Project typeAfter industrial gas projects, renewable energy has been the second largest projecttype in the CDM, followed by a variety of methane capture and combustion activities
ranging from landlls to coal mines and livestock management (see Figure 3.1).Much less common offset project types include), among others, energy efciency andbiological carbon sequestration ranging from forestry and agricultural activities toavoided land use change.
In contrast, Figure 3.1 shows that forestry carbon sequestration projects, closelyfollowed by renewable energy projects together accounted for about two-thirds of
the voluntary carbon market in 2006 outside of the CCX. Thus far, agricultural soilmanagement projects (e.g. no till practices) have dominated the CCX offset projectportfolio.
Bottom-up or top-down approachesIn addition to the relative cost of implementing projects, the availability of program-approved methodologies for quantifying emission reductions or removals is a keydeterminant of the mix of project types in the market today. In general, offset programshave developed two different approaches to determining offset project-type eligibility.
At one end is the bottom-up approach used under the CDM, where project types areconsidered, as submitted by the project developers, and approved if deemed adequateby the administrative body or program authority (CDM Executive Board, CDM EB).At the other end is a top-down approach, such as that taken by RGGI which spelled outin its Memorandum Of Understanding and Model Rule precisely which project typeswould be eligible, and which methodologies applicable, from the outset of the project(although other project types would be considered).
Project start dateThe project start dates listed in Table 3.3 refer to the cut-off date for project
commencement. In principle, a project type that has commenced prior to the startdate would be considered ineligible, although precise denitions of start-up varyamong programs. The typical rationale for setting a start date is to help to ensure that
offset programs actually lead to a project happening, that is, that they are additional.Therefore, the project start date is generally linked to the timing of the launch of theoverall offset program. The start dates of some programs, such as the CCX, predatethe start of the offset program launch and reect the grandfathering of offset creditscreated through other certication programs (e.g., RECs).
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Table3.3:Offsetprojecteligibility
Nameofp
rogram
Eligibleprojectloc
ations
Eligibleprojecttypes
Projectstart
date
InternationalOffsetMechanisms
CleanDevelopment
Mechanism
(CDM)
Developing(non-An
nex1)countrieswhere
DesignatedNationa
lAuthorities(DNAs)are
established
Allelig
ibleexceptnuclearenergy,newHCFC-22facilitiesor
avoideddeforestation
January120
00
JointImplementation
(JI)
Annex1countriesth
ataresignatoriestothe
KyotoProtocolwithcappedemissions
SameasCDMexceptland-use,land-usechangeandforestry
(LULUC
F)projects,whicharenotlimitedto
justafforestation
andreforestationproject
January120
00
Mandatory
CapandTradeSystems(OffsetFeatures)
AustraliaN
ational
EmissionsT
rading
System
Underdevelopment.
Designrecommendationsincludeboth
domesticandinternationaloffsetprojects.
Under
development.
Design
recommendationshaveprioritizedthefollowing
project
types:landuse,forestry,woodprod
ucts,avoided
deforestationandcarbongeosequestration
Underdevelo
pment
CanadasO
ffset
SystemforGreenhouse
Gases
Underdevelopment
Under
development
Underdevelo
pment
NewSouth
Wales
Greenhous
eGas
Abatement
Scheme
(NSW
GGA
S)
WithinNewSouthW
alesonly,exceptfor
electricitygeneration
projectswhichcan
bewithintheAustralianNationalElectricity
Market.
Add
itionalelectricityfromlowemissio
nsources
(includinguseofRECsascompliance
units)
Supplysideenergyefficiencyatexistin
gpowerstations
Dem
andsideenergyefficiency
Indu
strialon-siteemissionreductions
Fore
stcarbonsequestration(afforesta
tionor
reforestation)
Electricitygeneration:
January120
03
Demandside
management:January
12002inNSW
and
January120
04inthe
ACT
Carbonsequ
estration:
January120
03
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Nameofp
rogram
Eligibleprojectloc
ations
Eligibleprojecttypes
Projectstart
date
RegionalG
reenhouse
GasInitiative(RGGI)
WithinRGGIparticipatingstatesorother
approvedjurisdictions
Ifemissionallowanc
esexceedtheStage2
triggerprice(USD1
0),theeligibleproject
locationsisexpande
dtoincludeoffsetsfrom
anygovernmentalm
andatoryprogram
outsidetheUSwithatonnagelimitonGHG
emissions.
Landfillmethanecaptureanddestruction;
Reductioninemissionofsulfurhexafluoride(SF
6);
Sequestrationofcarbonduetoafforestation;
Avoided/reducednaturalgasoroilco
mbustiondueto
end
useenergyefficiencyinthebuildingsector;
Agriculturalmanuremanagementoperations;
Con
tinueddevelopmentofadditional
eligibleproject
type
sexpected
December202005
WesternClimate
Initiative(W
CI)
WCIapprovedandcertifiedoffsetsfrom
projectsintheUS,C
anada,andMexico;
and,
CDMoffsets,perhapssubjecttoadded
criteriaorstandards
Under
development.Prioritiesforprotocol
investigationand
developmentinclude:
Agriculture(soilsequestrationandma
nure
man
agement);
Fore
stry(afforestation/reforestation,forest
man
agement,forestpreservation/con
servation,forest
prod
ucts);and
Was
temanagement(landfillgasand
wastewater
man
agement).
Underdevelo
pment
OtherMan
datorySystems(OffsetFeatures)
AlbertaOffsetSystem
Albertaonly
AllprojecttypeswithapprovalbyAlbertaE
nvironment.
January120
02
Statepowerplantrules
(OR,WA,M
A)
Oregon:Anylocatio
n
Washington:Notspecified
Massachusetts:Limitedto10Northeast
states(CT,DE,ME,MA,MD,NH,NJ,NY,VT)
andUSCoastalWaters.Boundaryexpanded
toanylocationifoff
settriggerpriceis
exceeded.
ORorWA:nolimitationsorspecifications
MA:An
yexceptnuclearpowergeneration,
underwaterand
underg
roundsequestration.
ORandWA:
no
limitations
MA:January
12006
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Nameofp
rogram
Eligibleprojectloc
ations
Eligibleprojecttypes
Projectstart
date
CarbonFin
anceFunds
WorldBankCarbon
FinanceFunds
Nolimitations.Requ
irementsvarybyfund.
CDM/J
Irequirementsapply.Additionallim
itationsvaryby
fund.
CDM/JIrequ
irements
apply
VoluntaryC
apandTradeSystems(OffsetFeatu
res)
ChicagoClimate
Exchange(CCX)
AnycountryexceptE
uropeanUnionEmission
TradingSchememembercountriesorAnnex
1countriesthatare
signatoriestotheKyoto
Protocol
Energy
efficiencyandfuelswitching,coalm
inemethane,
agriculturalmethane,agriculturalsoilcarb
on,rangelandsoil
carbon
,forestrycarbon,landfillmethane,ozonedepleting
substance(ODS)destructionandrenewableenergy.
January119
99
Forestryprojects:
January119
90
ODSprojects:January
12007
VoluntaryG
HGReductionPrograms
ClimateLeaders
US
Curren
teligibleprojects:
landfill
methanecollectionandcombustion
manuremanagement(dairyorswine)
transitbussystems
industrialandcommercialboilers
affores
tation/reforestationprojects
Additio
nalprojecttypeseligiblewithprotoc
olapprovalbyUS
Environ
mentalProtectionAgency(EPA).
Underdevelo
pment
CaliforniaClimate
ActionRegistry(CCAR)
US
Curren
teligibleprojects:
affores
tation
conservation-basedforestmanagement
refores
tation
livestoc
kandlandfillmethanecapture
Carbonsequ
estration:
January119
90
Methanecap
ture:
January120
01
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Nameofp
rogram
Eligibleprojectloc
ations
Eligibleprojecttypes
Projectstart
date
VoluntaryG
HGAccountingProtocols
WBCSD/WRIGHG
ProtocolforProject
Accounting
Notdefined
Project
guidancecanbeappliedtoanypro
jecttype.Specific
guidelineshavebeendevelopedforgrid-connectedelectricity
andLU
LUCFprojects.
Notdefined
ISO
14064
Notedefined
Notde
fined
Notdefined
VoluntaryS
tandardsforOffsetProjectsandRetailers
GoldStand
ard(GS)
Alllocations,except
incountrieswith
emissioncapsunlessGoldStandard(GS)
VerifiedEmissionRe
ductions(VERs)are
backedbypermane
ntlyretiringassigned
amountunits(AAUs)
Renewableenergyandenergyefficiencyprojects.Excludes
hydrop
owerlargerthan15MW
January120
06
VoluntaryO
ffset
Standard(V
OS)
Alllocations,except
incountrieswith
emissioncapsunlessGSVERsarebackedby
permanentlyretiring
AAUs
CDM/J
Irequirementsapply.Additionalexc
eptionsinclude
HFCandlargehydropowerprojects.
CDM/JIrequ
irements
apply
VoluntaryC
arbon
Standard2
007(VCS
2007)
Alllocations,except
incountrieswith
emissioncapsunlessvoluntarycarbonunits
(VCUs)arebackedbypermanentlyretiring
AAUs.
AllprojecttypeseligiblewithVCSapprovedmethodology,
except
projectsfromnewindustrialgasfacilities
January120
02
Futurerestrictions:Start
datemustbe
within2
yearsofvalid
ationdate.
Green-eClimate
ProtocolforRenewable
Energy
US
Renewableenergyprojects:
wind,s
olar,hydropower(upto5MW;additional
specific
ations),geothermal,methanecaptu
re,oceanthermal
wavea
ndtidalenergy
Newprojecttypesevaluatedoncase-by-ca
sebasis
January120
05
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Nameofp
rogram
Eligibleprojectloc
ations
Eligibleprojecttypes
Projectstart
date
Green-eClimate
Program
Specifiedbyapplica
bleoffsetstandard
CDMs
tandardrequirementsexceptLULUC
Fandhydropower
>10M
W
excluded
AllVCS
2007excepthydropower>10MW
andadditional
nativespeciesrequirementforcarbonsequ
estrationprojects
January120
00
VoluntaryO
ffsetRetailers
ClimateTru
st
USandInternationa
l
Nolimitations
Afterdateof
project
approvalwiththe
ClimateTrust
TerraPass
US
Renewableenergyprojects:
windenergy
methanecapture
seeCCXand
VCS
NativeEnergy
US
Renewableenergyprojects:
windenergy
solarenergy
methanecapture
N/A
Myclimate
Non-Annex1countriesorSwitzerland
Renewableenergyandenergyefficiencyprojects
seeGoldStandard
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3.4 Additionality and quantification procedures
Table 3.4 shows the different approaches to additionality assessment and quantication
procedures across various offset programs. These are described further below. First,some of the key terminology as well as some of the key elements of additionality and
baseline evaluation are reviewed.
The design elements most fundamental to ensuring that offset projects are real andquantiable have also been the most contentious. In theory, additionality answersa very simple question: Would the activity have occurred, holding all else constant,if the activity were not implemented as an offset project? In practice, however,determining whether an offset is real through additionality requirements presents asignicant design challenge. Quantication of an offset projects GHG benets relies
on the development of a baseline scenario, a hypotheticalscenario of emissions thatwould have occurred had the activity notbeen implemented as an offset project. By
denition, this baseline scenario will never occur; instead, the offset credits generatedfrom a project are quantied with incomplete certainty based on the difference inemissions between the offset project and the baseline scenario.
Offset programs and providers differ in their overall approaches to additionalityand quantication procedures. Top-down programs tend to provide specic detailedaccounting rules upfront, while bottom-up programs tend to offer only generalguidelines for project GHG accounting and instead evaluate projects on a case-by-casebasis.
Project-based versus standardized additionality testingThere are two broad design approaches to evaluating additionality and the closely
linked process of determining baselines: project-specic and standardized (often
called performance standards). The project-specic approach involves the evaluationof individual projects based on one or more additionality tests. These project-specicadditionality tests are commonly based on the CDM additionality tool (See CDMAdditionality Tool Text Box), which evaluates whether the offset project is dependent
on offset project revenue ( investment test) or whether it has overcome signicantimplementation barriers ( barriers test). In addition, the CDM tool requires that thetechnology or practice used by the project must not be in common use ( commonpractice test). Most programs also require projects to be regulatory surplus, that is,that they exceed existing legal requirements.
Due in part to concerns regarding the partly subjective nature of some project-based
methods, several offset programs and protocols incorporate or rely exclusively onstandardized methods to assess additionality. Standardized methods include, amongothers, performance thresholds (emission rates or other characteristics dened based
on similar activities) and clearly dened common practice tests (e.g. lower thana specied level of market penetration for similar activities). Climate Leaders, theCCAR, the CCX, RGGI and the NSW GGAS are among the programs and protocols
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that rely more heavily on standardized approaches. The GHG Protocol for ProjectAccounting and International Organization for Standardization (ISO) 14064 standardsprovide guidelines for both approaches..
Baselines and quantification proceduresOffset programs also differ signicantly in how emission reductions or removals arequantied for individual offset projects. The expansion of offset programs in recentyears has led to a proliferation of baseline and monitoring quantication protocols,which are now far too abundant for them all to be described in detail here. For
example, the CDM includes over 70 approved methodologies for different projecttypes. Table 3.4 therefore focuses on the process by which quantication protocolsare developed. Approved methodologies include project-specic baselines developedfrom the bottom up by project participants and developers, the performance standardapproach developed from the top down by program administrators and authorities or
some hybrid of the two. Programs designed to accommodate an expanding set of offset
project technologies have tended to opt for a bottom-up approach, the CDM being theclassic example. Others, such as RGGI, have incorporated a signicant body of existingwork on protocol developments, and have opted for a more top-down prescriptiveapproach. Both top-down and bottom-up programs vary in their use of project-specicor performance standard approaches to determining baselines.
Investment analysis
Revenue from the carbon offsetsmust be a primary driver forproject implementation;
or
Barriers Analysis
Project implementation mustrequire the ability to exceedimplementation barriers, such aslocal resistance, lack of know-how, and institutional barriers;
and
Common practice analysis
Projects must employ technologythat is not very commonly used.
Flowchart of the CDM Additionality Tool version 4
CDM additionality tool
Sce: unfCCC (2004), EB-36rep, Ae 13
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Table3.4:AdditionalityandQuantificationProcedures
Nameofp
rogram
Add
itionalityandrelatedrequiremen
ts
Quantification(baseline/monitoring)p
rotocols
InternationalOffsetMechanisms
CleanDevelopmentMechanism
(CDM)
CDM
additionalitytool
Step
1:Identificationofalternativestoth
eprojectactivity
cons
istentwithmandatorylawsandregu
lations
Step
2:Investmentanalysisor
Step
3:Barrieranalysis,
Step
4:Commonpracticeanalysis,
Steps1,4andeither2or3aremustbe
fulfilled
Baselinesdefinedbymethodologies(proposedby
projectproponents,reviewedbyMethodol
ogyPanel),
manyusingstandardizedequations,some
basedon
project-specificparameters.
Nosta
ndardizedprotocolformonitoring.Monitoring
isdoneinaccordancewiththeprocesslaidoutinthe
registe
redProjectDesignDocument(PDD)
.
JointImplementation(JI)
Eithe
rthesameasCDMrequirements,o
r
Dem
onstrateuseofconservativeassump
tions
Base
doncomparabilityoftheprojectwithanotherAccredited
IndependentEntitydetermined(registere
d)project
CDMrequirementsapply
Mandatory
CapandTradeSystems(OffsetFeatures)
AustraliaN
ationalEmissionsTrading
System
Underdevelopment
Under
development
CanadasO
ffsetSystemfor
Greenhous
eGases
Underdevelopment.ExpectedtobebasedonISO
14064.
Under
development
NewSouth
WalesGreenhouseGas
Abatement
Scheme(NSW
GGAS)
Base
donpositivetechnologylistandestablishedbaseline
scen
arios
Explicitrulesandinstructionsforbaseline
quantificationprovidedinGHGBenchmarkRulesfor
eachtypeofprojectactivity.Monitoringrequirements
areou
tlinedbytheprogramadministrator
andinthe
GGAS
regulationrequirements.
RegionalG
reenhouseGasInitiative
(RGGI)
Regu
latorysurplustest
Noc
reditsforelectricgenerationwithinRGGI
Nof
undingfromanysystemorcustomerbenefitfund
Noc
reditsorallowancesawardedunderanyothermandatoryor
voluntaryGHGprogram.
Baselineandmonitoringprotocolsareout
linedin
detailforeacheligibleoffsetprojecttypeintheRGGI
Model
Rule.
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Nameofp
rogram
Add
itionalityandrelatedrequiremen
ts
Quantification(baseline/monitoring)p
rotocols
WesternClimateInitiative(WCI)
Underdevelopment
Under
development
OtherMan
datorySystems(OffsetFeatures)
AlbertaOffsetSystem
Regu
latorysurplustest
Real
(specificandidentifiableactionstha
treduceorremove
GHG
s)
Dem
onstrable(demonstrateanetreductioninGHGs)
Qua
ntifiable
Quantificationprotocolsaredevelopedby
Alberta
Environmentorproposedbyprojectdevelopersand
reviewedandapprovedbyAlbertaEnviron
ment
Statepowerplantrules(OR,WA,MA)
Regu
latorysurplustest(ORandMAonly
)
Offsetsmustbereal
ORan
dMA:Regulationprovidesguidancefor
requireddocumentationforquantification.
WA:noguidelines
CarbonFin
anceFunds
WorldBankCarbonFinanceFunds
CDM
/GoldStandardrequirementsapply
CDM/GoldStandardrequirementsapply
VoluntaryC
apandTradeSystems(OffsetFeatu
res)
ChicagoClimateExchange(CCX)
Regu
latorysurplustest
Definedasnewproject
Com
monPracticetest
CCX-d
evelopedpre-definedbaselinesand
methodologiesforeachspecificprojecttyp
e
VoluntaryG
HGReductionPrograms
ClimateLeaders
Larg
elyaperformancestandardapproa
ch
Regu
latorysurplustest.
Baselineandmonitoringprotocolsareout
linedin
detailforeacheligibleoffsetprojecttype.
CaliforniaClimateActionRegistry
(CCAR)
Perfo
rmancestandardapproachwherepossible
Regu
latorysurplustest
Perform
ancestandardsusedwherepossib
le
Generalproject-specificmonitoringprotoc
ols
develo
ped
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Nameofp
rogram
Add
itionalityandrelatedrequiremen
ts
Quantification(baseline/monitoring)p
rotocols
VoluntaryG
HGAccountingProtocols
WBCSD/WRIGHGProtocolforProject
Accounting
Proje
ct-basedandperformancestandardapproachesguidelines
prov
ided.Norequirements
Genericguidelinesforproject-specificand
performancestandardbaselinequantificationand
monito
ringprotocols.Norequirements.
ISO14064
Proje
ct-basedandperformancestandardapproachesguidelines
prov
ided.Norequirements
Generalguidanceofferedforbaselinequantification
andm
onitoringprotocols.Norequirements.
VoluntaryS
tandardsforOffsetProjectsandRetailers
GoldStand
ard
CDM
additionalitytool(latestversion)
Previousannouncementchecks
GSCE
Rs:allmethodologiesapprovedbyCDMEB
GSVERs:allmethodologiesapprovedbyCDM
EB,Sm
allScaleWorkingGroup(SSCWG),
United
Nation
sDevelopmentProgram(UNDP)Millennium
Develo
pmentGoals(MDG)CarbonFacility
Newm
ethodologiesmustbeapprovedby
GS
TechnicalAdvisoryCommittee.
VoluntaryO
ffsetStandard
CDM
/GoldStandardrequirementsapply
CDM/GoldStandardrequirementsapply
VoluntaryC
arbonStandard2007
(VCS2007)
Regu
latorysurplustest
Implementationbarrierstest
Com
monpracticetest
Perfo
rmance-basedandpositivetechnologylist-based
approacheswillbeeligibleinthefuture.
Noperformancetestsor
technologieshaveyetbeenapprovedby
VCS.
Project-specificquantificationprotocolsapprovedby
VCS.
AllCD
Mmethodologiesapproved.
Green-eClimateProtocolfor
Renewable
Energy
Regu
latory,legal,institutionalsurplustes
tand;
Timingtest(projectstartdate)
Technologytestandperformancetest
Project-specificstandardizedmethodology
developed
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Nameofp
rogram
Add
itionalityandrelatedrequiremen
ts
Quantification(baseline/monitoring)p
rotocols
Green-eClimateProgram
Requ
irementsofeachstandardapply
Requirementsofeachstandardapply
VoluntaryO
ffsetRetailers
ClimateTru
st
Regu
latorysurplustest
Barrierstest
Com
monpracticetest.
Baselinequantificationdevelopedinitiallybyproject
develo
persandverifiedbythird-partyauditors.
Monito
ringplansmustmeetrequirements
established
bythe
ClimateTrust.
TerraPass
VCS
andCCXrequirementsapply
Notpu
bliclyavailable
NativeEnergy
Regu
latorysurplustest
Barrierstest
Com
monpracticetest.
Project-specificquantificationprotocolsdeveloped
Myclimate
CDM
/GoldStandardrequirementsapply
CDM/GoldStandardrequirementsapply
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3.5 Program administration and authority
Table 3.5 lists the actors responsible for regulating various key aspects of each offset
program: overall administration, validation and/or verication, and project approvaland registration. All offset programs include some form of administrative body to
oversee the project approval process to ensure that the offset projects developed meet
established program requirements. Although there are several common components ofthe project approval process, programs have developed varied approaches to confrontkey quality assurance concerns.
Validation requirements provide ex-ante assessment and conrmation of offsetproject eligibility as dened by the rules of the program or standard.
Verication requirements provide ex-post assessments and conrmation ofquantication of the volume of emission reductions or removals that have beenproduced from an offset project across a certain period of time.
Registries have been used to reduce concerns regarding double counting bytracking information regarding ownership and development of the offset projects
and the credits generated.
Third-party auditors are required by some programs to help limit any potentialconict of interest between offset project developers and buyers, which bothhave nancial incentives for inating the volume of offset credits generated.
Project approval requirements vary among standards. Some programs havea decision- making body that approves offset projects after documentation is
submitted by auditors/project developers. Other programs use the auditors toapprove the projects and there is no additional project approval step.
The structure of program administrators varies by program type and design (see Table
3.5). Compliance programs are generally administered by either an existing regulatory
agency, as in the case of state regulatory agencies under RGGI, or an administrative body established exclusively for the offset program, as in the CDM EB. Voluntaryoffset providers are managed by a mix of Boards of Trustees, advisory committeesand paid staff.
Nearly all programs require some form of project validation and verication.Increasingly, programs require verication to be conducted by an approved third-party auditor independent of either the program administrator or the project developer.
Exceptions include the NSW GGAS, which assesses the need for project vericationon a case-by-case basis, and the Climate Leaders program, which recommends but
does not require third-party verication.
Some programs/standards give their auditors the decision-making power to approve orreject a project. Others have a separate body to evaluate and approve projects. Such a
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program or standard-based decision-making body adds another layer of quality control.Offset programs have incorporated the use of carbon offset registries to keep track ofoffset ownership and to minimize the risk of double counting. A registry assigns a
serial number to each veried offset and once the offset is used to claim emissionreductions, the serial number is retired preventing the credit from being resold. Nouniversal registry exists for either the compliance or voluntary offset markets, limitingtheir utility for minimizing double counting across the offset market. Instead, differentregistries have been developed; some tied to specic retailers, standards or complianceprograms, as in the case of the CDM Registry and the CCX Registry, and others whichfunction independently.
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Table3.5:ProjectApprovalProcess:Progr
amAdministrationandAuthor
ity
Nameofp
rogram
Whoadministers?
Whovalidates/
verifies?
Who
approves/
registers?
Nameofregistr
y
InternationalOffsetMechanisms
CleanDevelopmentMechanism
(CDM)
CDMExecu
tiveBoard
DesignatedOperational
Entities(DOEs)
CDM
Executive
Board
CDMRegistry
JointImplementation(JI)
JISuperviso
ryCouncil
AccreditedIndependent
Entity(AIE)
AIEunlessareview
isrequested,in
which
casetheJI
Super
visoryCouncil
appro
vestheproject
Offsetcreditstrac
ked
inrespectiveNational
Registries.
Mandatory
CapandTradeSystems(OffsetFeatures)
AustraliaN
ationalEmissions
TradingSys
tem
Underdeve
lopment
Underdevelopment
Underdevelopment
Underdevelopment
CanadasO
ffsetSystemfor
Greenhous
eGases
EnvironmentCanada
Underdevelopment
Enviro
nment
Canada
Underdevelopment
NewSouth
WalesGreenhouse
GasAbatementScheme(NSW
GGAS)
IndependentPricingandRegulatoryTribunal
ofNSW
(IPART)
Approvedthird-party
auditorinAuditand
TechnicalServicesPanel.
IPART
NSW
GGASRegistry
RegionalG
reenhouseGas
Initiative(RGGI)
Stateregulatoryagencies
Accreditedindependent
verifier
Stateregulatory
agenc
ies
Underdevelopment
WesternClimateInitiative(WCI)
Underdeve
lopment
Underdevelopment
Underdevelopment
Underdevelopment
OtherMan
datorySystems(OffsetFeatures)
AlbertaOffsetSystem
AlbertaGo
vernment
Endorsedbythird-party
auditor
AlbertaEnvironment
AlbertaOffsetRegistry
currentlyunderdevelopment
Statepowerplantrules(OR,
WA,MA)
OR:Energy
FacilitySitingCouncil
WA:EnergyFacilitySiteEvaluationCouncil
MA:Depar
tmentofEnvironmentalProtection
Varies(ClimateTrust
performsthisfunctionin