WRI J. Pershing, RGGI, May 2004 Use of GHG Project Offsets Reviewing Existing Programs Jonathan...

J. Pershing, RGGI, May 2004WRIWRI

Use of GHG Project Offsets Reviewing Existing Programs

Jonathan Pershing World Resources Institute

2nd Stakeholder Meeting of the Regional Greenhouse Gas InitiativeBoston, MA

Thursday, May 20, 2004


Overview

• Rationale for/against offsets• Alternatives to offsets• Review of existing programs with

consideration of key issues • Conclusions


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


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


PRO: Cost reductions can be significant with project offsets

$0

$50

$100

$150

$200

$250

$300

US Europe Japan

Domestic action only

Annex I application

Universal application*

*unlimited CDM

regional marginal costs, US$ per ton of carbon

Source: IEA Analysis of Kyoto compliance with US, no transactions costs


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


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


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


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


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


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)


Offsets locations

CDM Outside UNFCCC Annex I (capped) Parties

JI Within/ between UNFCCC Annex I (capped) Parties

EU Allows JI or CDM credits (i.e., both inside and outside EU and accession countries)

PCF Both developed (primarily EIT) and developing countries

ERUPT/ CERUPT

ERUPT: Annex I (capped) countries

CERUPT: Developing countries (uncapped)

CCX US, Canada, Mexico and Brazil only; others may be added


Allowed Sectors

CDM Any sectors with agreed methodologies; “refrain” from nuclear

JI No limits set; “refrain” from nuclear

EUNo nuclear; hydro allowed but to be reviewed, sinks restricted, double counting constraints could limit projects (particularly energy efficiency and renewables) in EITs

PCF Emphasis on renewable energy; limits on specific technologies, sinks and countries in portfolio of projects

ERUPT/ CERUPT

ERUPT: Renewables, biomass, cogeneration, efficiency, transport/distribution loss, fuel switching, waste management, afforestation and reforestation

CERUPT: Renewables, efficiency, transportation, fuel switching, waste management

CCXMethane and forestry offsets (US, Canada, Mexico and Brazil); fuel switching an renewable energy (US, Brazil); changes as agreed by offsets committee


LULUCF Treatment

CDM Modalities under consideration, restricted to reforestation and afforestation (no conservation)

JI No restrictions established (but likely to apply CDM rules)

EU No LULUCF project banking; other modalities under consideration (likely to apply CDM rules)

PCF Not LULUCF projects allowed

ERUPT/ CERUPT

ERUPT: Afforestation/reforestation projects only

CERUPT: No forestry projects allowed

CCX Forestry offsets (including reforestation, afforestation and conservation) allowed in US and Brazil


Limits to Allowable Share of Offsets

CDM Up to 1% of base year emissions X 5

JI

Any activity to be “supplemental” to domestic action although no limits yet set (track 2 may impose limits, note that “green investment” constraints may apply in some cases)

EU Review at 6%, reconsider at 8%; must be “supplemental”

PCF Not applicable

ERUPT/ CERUPT

Only 50% of total reductions required to be achieved through use of offsets (expected to be 1/3 through projects in capped countries, 2/3 through projects in uncapped countries)

CCX

Only 0.5% of the reductions in first year may be satisfied with offsets; this increases each year (to 1%, 1.5%, and 2%); no more than 5% of the total 4-year reduction from offsets


Timing

CDM Credit for certified projects undertaken post-2000

JI Projects begun post-2000; project credit from 2008

EU Projects allowed for credit from 2008

PCF Credit for any acceptable projects undertaken post-2000

ERUPT/ CERUPT

AAUs to 2008, ERUs 2008-2012

CCXMitigation realized from 2003-2006 on forestry projects begun from 1990, and on other projects from 1999;


Verification

CDMEstablishes operational entities and external 3rd party certification and verification procedures; EB maintains registry

JI Not yet established; track 2 likely to be based on CDM rules

EU Through JI/CDM accreditation/verification processes

PCF Initial verification that project built according to design specs; follow-on verification of project operation

ERUPT/ CERUPT

3rd party registration/certification following CDM rules

CCX Requires registration, independent 3rd party verification


Special Treatment for Renewable Energy

CDM Special provisions (“fast-tracking”) for small scale RE projects (>15 MW)

JI None set

EU No special dispensation

PCF Fund focus is on renewable energy (60% of portfolio)

ERUPT/ CERUPT

No special provisions

CCX No special provisions


Baselines determine crediting levels

• Baseline level and crediting lifetime determine maximum number of credits from a project

time

emis

sio

ns

project emissions

baseline

potentialcredits


0

100

200

300

400

500

600

700

800

900

1000

tCO

2/G

Wh

108

426

675

808

All sources

Natural gas only

North-Isolated region

Fossil fuel only

Wind Natural gas (BAT)

Possible emission credits under different multi-project baseline options

Natural Gas (BAT)382

Brazil: possible implications of standardised baselines in the

electricity sector


Baseline Procedures

CDMDefined case-by-case basis: (a) Existing actual or historical emissions; (b) economically attractive technology taking into account investment barriers; (c) average emissions of similar project activities in the previous 5 years, with performance in top 20% of category. Leakage addressed by inclusive project boundaries. QA/QC monitoring procedure

JI

Two track approach: (1) determined by host country government; (2) under auspices of supervisory committee that will develop operational rules (not yet selected); latter likely to be based on CDM rules. Former choice only allowed if host country satisfactorily complies with inventory and registry information

EU Uses JI/CDM modalities, rejects projects that would lead to double counting

PCF

Project specific baselines using investment analysis (supply side) and control group (demand side), uses standard World Bank data for country level baseline information, use “filters” to reject projects otherwise legally required. For grid, baseline plus power expansion over time, requires assessment against plausible alternatives

ERUPT/ CERUPT

As with CDM, but also focus on financial and economic additionality as well as barriers test. Uses standard emissions factors for electricity, all direct and indirect sources more than 1% of baseline emissions

CCXForest and soil offsets quantified according to project size and on-site and formulaic approaches; methane from control measurements, other additionality rules still to be developed


Offset Program Prices

Offset Price Trading Price

EU N/A ~ €12/ton CO2*

PCF ~$3 – 4/ton CO2 N/A

ERUPT/ CERUPT

~$4 – 5/ton CO2 N/A

CCX NA ~$1/ton CO2

Source: CO2e, Natsource, PCF, CCX

* EU price has declined in the past few weeks as national allocations priced in market


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


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.


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

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