In June 2013, US President Barack Obama directed his administration to establish regulations for greenhouse gas (GHG) emissions from new and existing power plants. But Congress has so far declined to implement a federal cap-and-trade system or a national carbon tax to regulate GHGs on a widespread basis, even though several legislators in both houses of Congress have introduced proposals to institute a price on carbon.
To compensate for the lack of national carbon dioxide (CO2) regulation, a dozen states have initiated their own regulations alone or in conjunction with others. In January 2013, California officially launched its comprehensive cap-and-trade program while nine states in the Northeast region of the US continue to participate in the Regional Greenhouse Gas Initiative (RGGI), a carbon trading program aimed at the power sector. The Canadian province of QuÃƒÂ©bec joined forces with California to form a cross-border market in January 2014 while Alberta continues to press forward with its carbon reduction program and British Columbia remains committed to its pioneering carbon tax and Carbon Neutral Government program. Pacific Coast neighbors British Columbia, California, Oregon and Washington have also joined forces to take on the challenge of reducing GHG emissions in the region, with Oregon and Washington possiblyÃ‚Â adopting a price on carbon pollutionÃ‚Â as part of this initiative, known as the Pacific Coast Collaborative.
But well before the launch of these state-run compliance markets, the Chicago Climate Exchange (CCX) aimed to demonstrate the viability of a multi-sector cap-and-trade program supplemented with project-based offsets. The CCX ceased its emissions reduction program in 2010, but continues to run a voluntary offsetting program for its members.
The Canadian province of Alberta became the first jurisdiction in North America to impose a carbon compliance system in July 2007. Alberta requires facilities that emit more than 100,000 tonnes of CO2Ã‚Â equivalent (CO2e) a year to reduce emissions intensity by 12%. Companies can comply by making improvements to their operations, purchasing Alberta-based offsets, contributing to the Climate Change and Emissions Management Fund or purchasing or using Emission Performance. CompaniesÃ‚Â paid about million into the Fund in 2012, which will be invested in projects and technology to reduce GHG emissions in Alberta, an amount that covers about 5.7 million tonnes (MtCO2e) of reductions required based on the current rate of $15/tCO2e.
Regulated entities in Alberta can comply with the GHG reduction program by purchasing offsets from other sectors that have voluntarily reduced their emissions under protocols approved by the Alberta government. In 2012, companies submitted 2.63 MtCO2e worth of offsets, according to government data.
The following project types are eligible for use in Alberta’s program:
|Aerobic Composting Projects||Aerobic Landfill Bioreactor Projects||Afforestation Projects (retracted for revisions)|
|Anaerobic Decomposition of Agricultural Materials Conservation Cropping||Anaerobic Treatment of Wastewater Projects Conversion of Drilling Rigs from Diesel-Electric to High Line Electricity Source||Biofuel Production and Usage|
|Direct Reductions in Greenhouse Gas Emissions Arising from Changes in Forest Harvest Practices||Distributed Renewable Energy Generation||Diversion of Biomass to Energy from Biomass Combustion Facilities|
|Emissions Reductions from Dairy Cattle||Energy Efficiency for Commercial and Institutional Buildings||Energy efficiency Projects|
|Engine Fuel Management and Vent Gas Capture Projects||Enhanced Oil Recovery||Enhanced Oil Recovery (streamlined)|
|Fuel Switching in Mobile Equipment||Gravel and Lightly Surfaced Road Rehabilitation Projects||Instrument Gas Conversion to Instrument Air Conversion in Process Control Systems|
|Landfill Gas Capture and Combustion||Low-Retention, Water-Powered Electricity Generation as Run-of-the-River or an Existing Reservoir||Nitrous Oxide Abatement from Nitric Acid Production|
|Nitrous Oxide Emissions Reductions in Agriculture||Non-Incineration of Thermal Waste Conversion||Reducing Days on Feed of Beef Cattle|
|Reduced Age at Harvest of Beef Cattle||Selection for Low Residual Feed Intake Markers in Beef Cattle||Solar Electricity Generation|
|Solution Gas Conservation||Substitution of Bitumen Binder in Hot Mix Asphalt Production and Usage||Waste Heat Recovery (streamlined)|
|Waste Heat Recovery Projects||Wind-Powered Electricity Generation|
California’s Global Warming Solutions Act (AB 32)
California’s cap-and-trade program is a key element of the state’s plan to comply with its ambitious pledge toÃ‚Â reduce the state’s GHG emissions to 1990 levels by 2020, a goal outlined by the state’s Global Warming Solutions Act of 2006 (AB 32). Unlike RGGI, the California program seeks to cap GHG emissions from all major industries, representing about 85% of the state’s emissions.
As part of the cap-and-trade program, the California Air Resources Board (ARB) holds allowance auctions and reserve sales to allow market participants to acquire allowances directly from the agency, with the first quarterly auction taking place in November 2012.
The use of offsets as an alternate compliance mechanism is seen as a critical factor in controlling the costs of achieving the emissions reductions mandated by the landmark legislation. California’s regulation limits the use of offsets to 8% of an entity’s compliance obligation.
To date, the ARB has approved five offsets project types: livestock, destruction of ozone depleting substances (ODS) from US projects, US forestry and urban forestry and now coal mine methane,Ã‚Â which was added to the list of approved protocolsÃ‚Â in April 2014. The ARB is currently scheduled to consider adopting a rice cultivation project type in September 2014. ARB officials are also expected to establish regulations to allow offsets from Reduced Emissions from Deforestation and Degradation (REDD) forest projects from Acre, Brazil and Chiapas, Mexico into California’s cap-and-trade program, although the timing of such deliberations is uncertain.
Oregon Carbon Dioxide Standard
Oregon and Washington require that new power plants offset a certain portion of their anticipated CO2Ã‚Â emissions, with the option of reducing their emissions or paying a fee to an organization that selects and fund offset projects.
In 1997, Oregon enacted the Oregon Standard, the first mandatory regulation of CO2Ã‚Â in the United States. The Oregon Standard requires that new power plants built in the state reduce their CO2Ã‚Â emissions to a level 17% below those of the most efficient combined-cycle plant, either through direct reduction or offsets. Plants may propose specific offset projects or pay mitigation funds toÃ‚Â The Climate Trust, a non-profit created by law to implement or procure offsets from projects that avoid, sequester or displace CO2Ã‚Â emissions.
In 2001, the program’s first offset contract was inked by The Climate Trust, which now has a portfolio that currently includes nine project types and 16 offset projects that are anticipated to offset 2.8 MtCO2e.
The types of projects included in the program are:
|Forest sequestration||Fuel switching||Industrial efficiency|
|Material substitution||Renewable energy||Transportation efficiency|
Regional Greenhouse Gas Initiative (RGGI)
In the US Northeast, nine states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont) have entered RGGI’s second compliance phase.Ã‚Â The regional cap-and-trade systemÃ‚Â originally had 10 members at the start of the program, but New Jersey subsequently withdrew at the end of the first compliance period in December 2011.
The remaining members have implemented a comprehensive overhaul that lowered the emissions cap and aims to strengthen the program, which until early 2013 saw allowances trading at the reserve price. The RGGI states approved a 45% reduction in the 2014 cap, from 165 MtCO2e to 91 MtCO2e, with additional decreases of 2.5% annually from 2015-20. The revamp has once again provided a boost to the program, with RGGI allowances selling at a record $4 per short ton in the first auction since the planned changes went into effect, held on March 5, 2014.
Despite allowing for the use of offsets, the RGGI program has not prompted the production of offsets due to low allowance prices and technical challenges and RGGI officials do not anticipate offsets coming into the market until a time, if ever, allowance prices rise significantly higher. The original model rule would have allowed certified emission reductions issued under the United Nations’ Clean Development Mechanism to enter the RGGI program if the twelve-month rolling average allowance price reached $10/tCO2e, but international offsets are now banned from the program. The cap on the use of domestic offsets will remain at 3.3% rather than increasing if allowance prices reach certain thresholds, as dictated by the original model rule.
The RGGI states added a new forestry protocol to allow projects for improved forest management, avoided conversion and reforestation based mainly on the ARB’s US forests offset protocol to leverage the work done by the ARB and the Climate Action Reserve and to provide consistency with the ARB program, which is supporting the development of a domestic supply of these offsets. However, Connecticut and New York will continue to allow projects to be developed under the afforestation protocol featured in the original model rule. Forestry projects that have generated credits in a voluntary offset program would be permitted to transfer to the RGGI program, assuming that they meet all other RGGI requirements and there is no double counting.
The RGGI program also allows for offsets from four other project types: landfill methane capture and destruction, sulfur hexafluoride (SF6) reduction in the electricity sector, avoided agricultural methane emissions, and energy-efficient building projects.
Western Climate Initiative (WCI)
In April 2013, California Governor Jerry Brown found that the QuÃƒÂ©bec system is similar or identical to the US state’s program in all material aspects, paving the way for the two cap-and-trade programs to officially link in January 2014. California and QuÃƒÂ©bec form theÃ‚Â core of the current Western Climate Initiative (WCI)Ã‚Â as they are the only two jurisdictions among WCI members to fully commit to an emissions trading program so far.
QuÃƒÂ©bec has set a constant cap for its first compliance period (2013-14) at 23.2 MtCO2e, when the program covers the electricity and certain industrial sectors accounting for about 30% of total GHG emissions in the province, according to the World Bank’sÃ‚Â Mapping Carbon Pricing InitiativesÃ‚Â report. The cap rises to 65.3 MtCO2e in the second compliance period (2015-17) when the fuel distribution sector is phased into the program, but the cap decreases by 2.1 MtCO2e in each year. In 2015, the scheme will cover approximately 85% of total GHG emissions in the province. QuÃƒÂ©bec’s total GHG emissions were 82.5 MtCO2e in 2010, the World Bank report noted.
As in California, the use of offsets is limited to 8% of a regulated entity’s compliance obligation in QuÃƒÂ©bec. Offsets can be issued from three domestic protocols: covered manure storage facility projects for methane destruction, landfill site projects for methane destruction and ODS projects with material sourced from refrigerators.
Six other US states Ã¢â‚¬â€œ Arizona, Montana, New Mexico, Oregon, Utah and Washington Ã¢â‚¬â€œ were previously WCI members, but formally dropped out of the program in November 2011 amid the economic recession and rising pushback against the cap-and-trade concept in the US. All of these states with the exception of Utah are now members of an initiative called North America 2050, which aims to facilitate cost-effective state and provincial policies that reduce GHG emissions and create economic opportunities. NA2050 has its origins in the 3-Regions Collaborative, which began in 2009 and included representatives from RGGI, WCI and the Midwestern Greenhouse Gas Reduction Accord who were considering potential areas of linkage between the developing carbon trading programs.
British Columbia, Manitoba and Ontario remain WCI members, but have yet to commit to implementing cap-and-trade programs. ButÃ‚Â British Columbia has had a carbon tax in place since July 2008, initially set at C$10/tCO2e and increasing each year by C$5/tCO2e through 2012.
The tax on carbon emissions is a critical component of British Columbia’s Climate Action Plan to reduce GHG emissions by 33% by 2020, according to the Ministry of Finance. Since the tax took effect in 2008, British Columbians’ use of petroleum fuels subject to the tax has dropped by 15.1% Ã¢â‚¬â€œ and by 16.4% compared to the rest of Canada, according to a report by research organization Sustainable Prosperity.
The Pacific Carbon Trust was a now-defunct British Columbia Crown corporation tasked with sourcing offsets to meet the provincial government’s carbon neutrality commitment. The trust developed the Pacific Carbon Standard, which defines the requirements for developing offsets to be recognized as Pacific Carbon Units (PCU). Originally exclusively owned and transacted by Pacific Carbon Trust, PCUs are now transacted by other parties for the voluntary market. Under British Columbia’s standard, the average price of offsets is $25/tCO2e, with 0.07 MtCO2e transacted and 0.8 MtCO2e retired in 2012.
Forest Trends’ Ecosystem Marketplace’s California Welcomes Coal Mine Methane Emissions Reduction Projects
Regional Greenhouse Gas Initiative (RGGI)
Western Climate Initiative (WCI)
The World Bank’s Mapping Carbon Pricing Initiatives report
Forest Trends’ Ecosystem Marketplace’s Can Oregon and Washington Price Carbon Pollution?
US buyers purchased 9.7 MtCO2e of offsets for California compliance last year, changing little from the previous year’s demand, despite several obstacles Ã¢â‚¬â€œ including a lawsuit challenging the use of offsets in the program, according to Forest Trends’ Ecosystem Marketplace’sÃ‚Â State of the Voluntary Carbon Markets 2013Ã‚Â report. However, with the dismissal of the petition in January 2013 and the clarification of key aspects of the offset program, market participants expect increased interest in credits bound for the California compliance market.
California regulators strictly limit the types of projects that can generate compliance offsets for the program. By far, the most popular offsets are generated by projects that destroy ozone-depleting substances (ODS) that would have otherwise been vented into the atmosphere, accounting for 41% of the total volume of California-bound credits, according to the Ecosystem Marketplace report. About four million tonnes MtCO2e of ODS offsets were transacted for the California market, twice the volume dealt in 2011, while the average price of the offsets rose by about $1.20 per tonne of carbon dioxide equivalent.
No pre-compliance offset transactions have been reported for Quebec yet, but market participants expect this could change in 2013.
CHICAGO CLIMATE EXCHANGE
Launched in 2003, the Chicago Climate Exchange (CCX)Ã‚Â was the first voluntary, but legally binding, carbon cap-and-trade program in the US. The exchange aimed to help businesses prepare for potential regulations of GHG emissions, with corporations committing to reducing their aggregate emissions by 6% by 2010.
CCX was founded by Richard Sandor, often called the Ã¢â‚¬Å“father of carbon tradingÃ¢â‚¬Â, to trade six different types of GHGs. In 2010, IntercontinentalExchange acquired CCX and its global affiliates.
The exchange’s unit of trade is the Carbon Financial Instrument (CFI), which represents 100 tonnes of carbon dioxide equivalent (tCO2e). CCX allowances soared to a high of $7.39 tCO2e in May 2008 amid expectations that the offsets would be incorporated in a federal cap-and-trade program in the US. The exchange was included in comprehensive climate legislation that narrowly passed the US House of Representatives in 2009 that would have implemented a federal emissions trading program for carbon. However, the bill failed to muster the necessary support in the Senate and the CCX subsequently announced it would terminate its emissions reduction program at the end of the second compliance phase in 2010.
The total program baseline covered about 700 million tonnes (MtCO2e). In each year of the program,Ã‚Â the verified emission reductions achieved by CCX members exceeded the compliance requirement, according to the exchange’s final compliance report.
CCX continues to operate the Chicago Climate Exchange Offsets Registry Program to register verified emission reductions under 10 offset protocols even though there is no longer a compliance obligation.
Eligible offset project categories in the CCX program are:
|Agricultural Methane Collection and Combustion||Avoided Emissions from Organic Waste Disposal|
|Coal Mine Methane Collection and Combustion||Continuous Conservation Tillage and Grassland Conversion|
|Forestry Carbon Sequestration (Afforestation and Reforestation and Sustainable Forest Management)||Landfill Methane Collection and Combustion|
|Ozone Depleting Substance Destruction||Renewable Energy Systems|
|Small-Scale Renewable Biogas||Sustainably Managed Rangeland Soil Carbon Sequestration|
In 2012, a significant volume of offsets were voluntarily transacted and reported via CCX, making it the third most contracted standard in North America and contributing to an overall rise in regional volumes compared to 2011, but pressuring the overall value of the North American offset market as CCX credits were valued at pennies per tonne. Only one third of CCX offsets were from agriculture, forestry and land use projects in the US, according to Forest Trends’ Ecosystem Marketplace’sÃ‚Â State of the Voluntary Carbon Markets 2013Ã‚Â report. Worldwide, CCX offsets were sourced from nine other countries, including Costa Rica, Germany, Brazil, India and China.