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
J. Pershing, RGGI, May 2004WRIWRI
Overview
• Rationale for/against offsets• Alternatives to offsets• Review of existing programs with
consideration of key issues • Conclusions
J. Pershing, RGGI, May 2004WRIWRI
Rationale for using GHG offsets
Pro• Reducing individual and system costs by extending
compliance options – adds compliance flexibility• Brings in new/ uncovered sectors and facilities• Allows industry outside of capped sectors to “test” working of
system• Creates opportunities for innovation• May make political agreement on cap easier – now and in
future• Some sources that are difficult to quantify in cap-and-trade
can be accurately measured in offset program
J. Pershing, RGGI, May 2004WRIWRI
Rationale for using GHG offsets
Con• Adds administrative complexity and
costs• Assuring quality/ environmental integrity
of offsets is difficult• Reduces incentives for new entrants to
join trading system
J. Pershing, RGGI, May 2004WRIWRI
PRO: Cost reductions can be significant with project offsets
$0
$50
$100
$150
$200
$250
$300
US Europe Japan
Domestic action onlyAnnex I applicationUniversal application*
*unlimited CDM
regional marginal costs, US$ per ton of carbon
Source: IEA Analysis of Kyoto compliance with US, no transactions costs
J. Pershing, RGGI, May 2004WRIWRI
CON: Undermines environmental integrity
“…most of the projects would have been realised even without CDM-finance, which implies that the …support has no added value….It would certainly be optimal to prove unambiguously that non-feasible projects would turn into feasible, due to CDM-finance. Unfortunately, this "financial additionality" appears to be a very weak selection criterion. Practice shows that such forecast calculations could be adjusted in favour of any desired outcome.” -- VROM (Netherlands), review of NGO critique
J. Pershing, RGGI, May 2004WRIWRI
Alternatives to Offsets (1)
• Opt-ins– Allows facilities not covered initially to become
covered (capped) and receive and trade allowances
– Implies participation in emissions monitoring/reporting/inventory requirements
– Determining stringency of opt-in caps challenging– Used in acid rain program – but problematic here,
as only sources already reducing opted in
J. Pershing, RGGI, May 2004WRIWRI
Alternatives to Offsets (2)• Set-asides (under a cap)
– Provide allowances to owners of non-covered facilities– Allowances may be banked or traded– Rules for set-asides have elements similar to those of offsets:
• Project is not otherwise required or generate other compliance/ permitting credits
• Project operates in the years it receives credits• Project should reduces/displaces emissions • Emissions reductions are measurable/verifiable
– Do not change overall emissions (come out of cap)– Used in NOx Budget Trading Program
J. Pershing, RGGI, May 2004WRIWRI
GHG Offsets Programs• International programs
– UNFCCC/Kyoto Protocol (JI, CDM)– EU Emissions trading system (through its linking directive)– World Bank – Carbon Finance (PCF and others)
• National programs– Dutch CERUPT/ERUPT Programs– Canada– Denmark– Japan– US Activities Implemented Jointly, State programs (e.g., Oregon Climate
Trust)• Private sector programs
– Chicago Climate Exchange (CCX) – project offsets
Non-GHG offsets programs (such as NOx, SO2 and others) nor CO2 adder programs are considered here
J. Pershing, RGGI, May 2004WRIWRI
Key Issues (1)• Offsets location
– Issue: inside or outside of the region where cap applies?– Conflict: reduced permit price vs. administrative costs, potential loss in
environmental integrity and sending revenues out of region• Allowed Sectors
– Issue: which sectors, which gases– Conflict: reduced permit price vs. lack of certainty in emissions quantification
(includes issues of double counting and indirect emissions)• LULUCF
– Issue: whether to allow forest/agriculture/soils offsets– Conflict: reduced permit price and added industries vs. lack of certainty in
emissions quantification and permanence concerns• Limits to allowable use
– Issue: Share of reductions to be allowed from offsets– Conflict: reduced permit price vs. promoting local emissions reductions
J. Pershing, RGGI, May 2004WRIWRI
Key Issues (2)• Timing
– Issue: what are the start/end dates for project crediting– Conflict: allowing more projects vs. additionality
• Verification– Issue: How stringent/what procedures to be used– Conflict: transactions costs vs. environmental integrity
• Special treatment for renewable energy– Issue: Should offsets promote RE– Conflict: least cost options vs. technology push incentives as well as
accuracy of offset calculation vs. simplicity and feasibility• Baseline rules
– Issue: What rules for ensuring additionality – Conflict: limiting project numbers vs. environmental integrity of each
project (limiting leakage, successful monitoring over time)
J. Pershing, RGGI, May 2004WRIWRI
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) countriesCERUPT: Developing countries (uncapped)
CCX US, Canada, Mexico and Brazil only; others may be added
J. Pershing, RGGI, May 2004WRIWRI
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 reforestationCERUPT: 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
J. Pershing, RGGI, May 2004WRIWRI
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 onlyCERUPT: No forestry projects allowed
CCX Forestry offsets (including reforestation, afforestation and conservation) allowed in US and Brazil
J. Pershing, RGGI, May 2004WRIWRI
Limits to Allowable Share of OffsetsCDM Up to 1% of base year emissions X 5
JIAny 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)
CCXOnly 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
J. Pershing, RGGI, May 2004WRIWRI
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;
J. Pershing, RGGI, May 2004WRIWRI
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
J. Pershing, RGGI, May 2004WRIWRI
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
J. Pershing, RGGI, May 2004WRIWRI
Baselines determine crediting levels
• Baseline level and crediting lifetime determine maximum number of credits from a project
time
emis
sion
s
project emissions
baseline
potentialcredits
J. Pershing, RGGI, May 2004WRIWRI
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
J. Pershing, RGGI, May 2004WRIWRI
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
JITwo 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
J. Pershing, RGGI, May 2004WRIWRI
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
J. Pershing, RGGI, May 2004WRIWRI
Criteria for Program Evaluation• Broad coverage, incentivizing lowest cost reductions
wherever they occur– CDM is relatively high
• Assuring environmental integrity of cap (limiting “non-additional” projects); requires methodology with high confidence– CDM is unclear (projects rejected by EB – and criticized by NGOs;
more projects recently passing screening)• Reducing uncertainty for developers
– CDM is low (note numerous project proposal rejections)• Minimizing transactions costs for developers
– CDM is low (estimates run to several hundred thousand $ ) • Minimizing oversight costs for program managers
– unknown
J. Pershing, RGGI, May 2004WRIWRI
Some very generic conclusions• While the rationale for offsets has prevailed (in that many systems are being
explored), the difficulties in operationalizing programs has meant relatively slow starts
• However, level of industry interest has been quite high (number of applications rapidly increasing and suggests that offsets have mobilized innovation
• A review of the existing programs suggests that several solutions have been found to minimize environmental integrity loss; it is still too early to assess success in this domain.
• Prices suggest that offsets are less expensive than trades within and between capped parties.
J. Pershing, RGGI, May 2004WRIWRI
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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