Integrating High Quality Greenhouse Gas Offsets Into North ...
Integrating High Quality Greenhouse
Gas Of sets Into North American
Cap-and-Trade Policy
J U L Y 2 0 0 8
PURPOSE AND OVERVIEW
This document is intended to provide policymakers with practical
recommendations regarding the integration of greenhouse gas (GHG)
offsets (“offsets”) into emerging regulatory systems. Offsets have an
important role to play in controlling the costs associated with regulating
and reducing GHGs, and in driving technology transformation in
sectors not mandated to reduce their GHG emissions. In order for
offsets to deliver on their intended purpose—the achievement of a
real and verifiable reduction in global GHG emission levels beyond
what would have otherwise occurred—regulatory programs must
be designed to ensure the quality and effectiveness of offsets used to
meet GHG reduction requirements. Moreover, policymakers must
have a clear understanding of both the opportunities and challenges
presented by the integration of offsets into GHG emission-reduction
systems.
This document represents the consensus of the member organizations
of the Offset Quality Initiative: The Climate Trust, Pew Center on Global
Climate Change, California Climate Action Registry, Environmental
Resources Trust, Greenhouse Gas Management Institute and The
Climate Group. The GHG mitigation field is evolving at a rapid pace
and will continue to do so over the next several years; this document
will be updated over time to reflect any changes in the Offset Quality
Initiative’s consensus positions.
The work of the Offset Quality Initiative is generously supported by the
Energy Foundation.
Offset Quality Initiative
TABLE OF CONTENTS
SECTION I
Introduction and Background
1
The first section includes an introduction to the current state of the offset
market in the United States and an explanation of how offsets are defined
in this paper. This section also includes a discussion regarding the role and
advantages of offsets in regulatory systems.
SECTION II
Key Offset Quality Criteria
3
The second section provides recommendations regarding the key criteria for
offset quality. It addresses core project qualification and accounting concepts
such as: additionality, baseline establishment, monitoring and verification,
ownership, leakage, and permanence. It also addresses the operationalization
of additionality, quantification, and baseline establishment methodologies in
regulatory programs.
SECTION III
Of set Policy Design
Principles and Recommendations
10
The third section addresses offset policy design principles and provides a high-
level overview of, and recommendations for, the key components necessary to
develop a robust, transparent, feasible, and adaptable regulatory offset program.
This section provides discussion of many key regulatory design questions in-
cluding: geographic and quantitative limits, crediting periods, and ongoing pro-
gram implementation and administration.
SECTION IV
GHG Reduction Project
Categories and Considerations
17
The final section addresses the three categories of GHG reduction projects:
direct, indirect, and sequestration. It also provides recommendations for their
integration into regulatory GHG offset programs.
Integrating High Quality Greenhouse Gas Offsets Into North American Cap-and-Trade Policy
I. INTRODUCTION AND BACKGROUND
As the United States embarks on the path toward addressing climate change,
multiple strategies will be needed to achieve the significant cuts in GHG emissions
(“emissions”) necessary to stabilize the climate. Among the most important, complex
and controversial of these strategies is the use of GHG offsets (“offsets”). An offset
represents the reduction, removal or avoidance of GHG emissions from a specific
project that is used to compensate for GHG emissions occurring elsewhere.
While there is currently a growing voluntary market for offsets in the United
States, offsets can also be effectively incorporated into mandatory policies such
as cap-and-trade systems, which can be designed to allow firms to buy and trade
credits generated by qualifying emission reduction projects (“projects”) outside the
boundaries of the emissions cap. These are referred to as offset credits (“offsets”),
and each typically represents one metric ton of carbon dioxide equivalent.1
Offsets are used in lieu of an emissions reduction, removal or avoidance (“reduction”)
that would have otherwise been required to occur within the boundaries of the
emissions cap. In other words, provided that the project meets the established
eligibility criteria, the purchasing firm is allowed to use offset credits to meet
its compliance obligation as though the firm had made the reduction itself. The
essential promise of an offset is the achievement of a real and verifiable reduction
in global GHG emission levels beyond what would have otherwise occurred that is
equally effective as on-site emission reductions by regulated entities.
The Advantages of Offsets in Climate Change Policy
The Offset Quality Initiative (OQI) believes that the incorporation of offsets into
climate change policy will be a critical contributor to reducing the overall cost of
an emission-reduction program and facilitating the transition toward a low-GHG
economy.
1 Carbon dioxide equivalents (CO e) are the universal units of measurement used to indicate the
2
global warming potential (GWP) of each of the six GHGs: carbon dioxide (CO ), methane (CH ),
2
4
nitrous oxide (N O), perflurocarbons (PFCs), hydrofluorocarbons (HFCs) and sulphur hexafluoride
2
(SF ). It is used to evaluate the impacts of releasing (or avoiding the release of) different GHGs. CO e
6
2
are calculated based on Global Warming Potential values established by the Intergovernmental Panel
on Climate Change (IPCC).
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Specifically, including offsets in a cap-and-trade system has five important advan-
tages:
• Offsets are a market-based mechanism that enable capped entities to take
advantage of lower-cost reduction opportunities in uncapped sectors, which
can reduce the overall costs of achieving GHG reduction requirements.
• Offsets can realize significant emission-reduction opportunities in sectors
that either are not covered by or are not appropriate for an emissions cap.
They can also enable participation in GHG reduction systems by emission
Definition
sources that are not readily or cost-effectively addressed by traditional
of an offset
command-and-control regulation.
An offset represents
• Offsets can stimulate emission-reduction activities in the beginning years
the reduction, removal,
of a GHG reduction regime, driving important changes in infrastructure,
or avoidance of GHG
technology, and behavior in uncapped sectors.
emissions from a specific
• Offsets can provide a significant driver of new, innovative technologies that
project that is used to
will help the transition to a low-GHG economy, reduce reliance on fossil
compensate for GHG
fuels, increase energy security, and assist in meeting emission-reduction
emissions occurring
targets.
elsewhere.
• Offsets can promote technology and knowledge transfer between the
developed and developing worlds. These technologies can provide both
*One offset credit
represents one metric ton
emission reductions and other important environmental, social, and
of CO equivalent
2
economic co-benefits.
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II. KEY OFFSET QUALITY CRITERIA
A key assumption regarding the inclusion and usage of offsets in a cap-and-trade
program is that they represent credible emission reductions. The following are the
key criteria that OQI believes all offsets must meet to ensure their integrity.
Offsets Should Be Real. Project-based offset credits should represent actual emission
reductions and not simply be artifacts of incomplete or inaccurate accounting.
Offsets Should Be Additional. Because offsets are used to compensate for emission
reductions that an entity operating under an emissions cap would otherwise have
to make itself, the reductions resulting from offset projects must be shown to be “in
addition to” reductions that would have occurred without the incentive provided
by offset credits. The revenue from selling the project’s emission reductions should
be reasonably expected to have incentivized the project’s implementation for an
offset project to be considered additional.
Determining additionality is an essential but approximate process. Establishing
why a project was implemented is difficult; thus, practitioners and regulators
generally rely on a series of tests to determine a project’s additionality. These tests
can assess the regulatory, financial, technical, institutional, and/or other barriers a
project or project type faces to its implementation. No single approach is the best
for all projects or project types, and generally a combination of tests is necessary.
OQI supports the development of cost-effective, robust, and flexible additionality
assessment tools that provide a standardized, transparent, and rigorous framework
for the eligibility of offset projects. These tools should account for real variation
in the characteristics of different project types and other factors, such as project
location, prevailing market conditions, and existing regulation.
Additionality is addressed in greater detail in the section titled “Operationalizing
Offset Additionality and Quantification.”
Offsets Should Be Based on a Realistic Baseline. A GHG emission baseline must
be established in order to quantify an offset project’s GHG reductions. A baseline
represents forecasted emission levels in the absence of the offset project; this is
sometimes referred to as the baseline scenario, or the “without-project” case. The
difference between the baseline and the actual emissions after the offset project is
implemented represents the reductions achieved by the project, and this amount is
credited as an offset. Offsets are only as credible as their baselines.
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There are two general approaches to baseline assessment: project-specific and
standardized. With project-specific baseline assessments, each project has a unique
baseline developed on a case-by-case basis. With standardized baseline assessments,
a standard emission baseline is estimated for an entire project type or economic
sector, which is used by all projects of that type or within that sector. Standardized
Offsets should:
assessments require an up-front analysis of regulatory, institutional, technical, and
economic characteristics of a project type or sector.
• Be real
• Be additional
Baseline establishment and quantification is addressed in greater detail in the
• Be based on a realistic
section titled “Operationalizing Offset Additionality and Quantification.”
baseline
• Be quantified and
Offsets Should Be Quantified & Monitored. Emission reductions from offset
monitored
projects must be accurately quantified. Each project must have a unique monitoring
• Be independently
plan that defines how, when, and by whom data will be collected and emissions
verified
quantified. These plans should be developed with experts familiar with the specifics
• Be unambiguously
of a project and should use established standards such as the World Resources
owned
Institute’s Greenhouse Gas Protocol for Project Accounting and the International
• Address leakage
Standards Organization 14064-Part 2.2
• Address permanence
• Do no net harm
Offsets Should Be Independently Verified. All GHG reductions should be
verified by an independent, qualified, third-party verifier according to approved
methodologies and regulations. Verifiers should be entities whose compensation is
not in any way dependent on the outcomes of their decisions. Regulatory regimes
should have an approved list of offset project verifiers and should have procedures
in place to ensure that conflicts of interest are avoided. Ex post monitoring and
verification reports should be used as the basis for issuing offset credits.
Offsets Should Be Unambiguously Owned. Clear and uncontested title to offset
credits should be established by contractual assignment and/or government
recognition of ownership rights. Furthermore, the transfer of ownership of any
and all offset credits must be unambiguous and documented. Once sold, the
original seller of the offset credit (and the project owner) must cede all rights to
claim future credit for the same reductions in order to avoid double counting.
Finally, offsets must be serialized and accounted for in a registry or other approved
tracking system.
2 The GHG Protocol and ISO 14064-Part 2 provide different, but mutually supportive, contributions
to offset policy. The former provides commonly accepted guidance on offset quality, while the
latter provides an auditable framework for offset certification. Neither, though, provides the level of
technical detail necessary for the design of project type-specific protocols needed to implement an
offset program.
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Offsets Should Address Leakage. Leakage is defined as an increase in emissions
outside of the project’s emissions boundary that occurs as a result of the project’s
implementation. For example, avoiding deforestation through an offset project
in one area could simply shift forest harvesting (and the resultant emissions) to
a different region or country. Offset program design should include monitoring/
verification plans and protocols that provide the necessary mechanisms to properly
account for potential leakage over the life of an offset project.
Offsets Should Address Permanence. There is a risk that emission reductions
generated by certain offset project types can be reversed, and thus are not
The three most
permanent. Permanence is a type of project risk most often associated with
common methods
biological and geologic sequestration of emissions. For example, reductions
of project
realized through a forest sector project could be reversed through a forest fire.
assessment are:
Regulatory regimes should address permanence through policy mechanisms that
ensure the minimization of loss in the case of project reversal. Such mechanisms
1. Project-Specific
include reserve pools, buffer accounts, and insurance, among others. Permanence
Assessments
is explored in greater detail in section IV, which is titled “GHG Reduction Project
2. Standardized
Categories and Considerations.”
Assessments
3. Hybrid Assessments
Offsets Should Do No Net Harm. Offset projects should not cause or contribute
to adverse effects on human health or the environment, but should instead seek to
provide health and environmental co-benefits whenever possible.
Operationalizing Offset Additionality and Baselines
As described in the previous section, two of the most important aspects of offset
program design and project eligibility are determining the additionality of a
project and establishing its emission baseline. There are a variety of approaches
to determining additionality and establishing baselines, ranging from case-by-
case evaluations of projects to the development of standardized assessment
methodologies. A range of approaches are utilized in offset programs today, and
each approach has advantages and disadvantages, which are discussed in greater
detail in the following section.
The three most common methods for determining additionality, estimating
baselines, and quantifying the emission reductions of an offset project are:
1. Project-Specific Assessments
2. Standardized Assessments
3. Hybrid Assessments
Project-Specific Assessments
Project-specific assessments are individual or case-by-case examinations of the
unique circumstances of a proposed offset project. Individualized assessments may
be made regarding a project’s additionality, baseline, quantification, and crediting
period.
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Advantages of project-specific assessments
• Greater likelihood of correctly determining whether a project is additional
because specific circumstances of a project can be assessed in detail.
• Greater potential for accurately quantifying real reductions in GHG levels
because the baseline scenario and crediting period are tailored to the
specific characteristics of a project.
Disadvantages of project-specific assessments
• Greater risk of subjectivity and less consistency across projects of a similar
type. Subjectivity can also result in reduced transparency.
• Can be time and labor intensive, thereby increasing the transaction costs
of a project.
• May reduce the flow of projects into the market by increasing the risk (i.e.,
uncertainty) faced by project developers, who must anticipate subjective
judgments of regulators and accept the risk that their project may not be
approved.
Standardized Project Assessments
Standardized approaches credit reductions on the basis of uniformly applicable
criteria. A standardized approach typically defines additionality as a set of objective
eligibility criteria based on an assessment of regulatory, financial, institutional, and
technical conditions for a particular project type.
There are a number of different standardized approaches utilized in offset programs
today to determine additionality, baselines and crediting periods. Standardized
assessments can incorporate default or historical emissions rates or other data
to ensure that realistic and transparent factors are used to quantify the emission
reductions expected from a given project type. These approaches must be based on
detailed technical and economic analysis of individual project types, technologies,
and markets. They include:
• Performance standards, which are defined as projects whose characteristics
meet criteria established for that project type. Examples of performance
standards include:
– Efficiency rates (energy per unit of output)
– Emission rates (emissions per unit of output)
– Market penetration rate (how commonly the technology is used
within its sector)
• Technology benchmarks, which are defined as specific technologies in
certain sectors and locations that are automatically deemed additional. For
example, the use of methane digesters in certain countries or regions is rare
and thus could be deemed additional. Separate technology benchmarks can
also be used to establish an emissions baseline for a given project type.
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Advantages of standardized assessments
• Minimizes or eliminates subjective judgment in the determination of
baselines and additionality by using objective criteria.
• Streamlines the project development process, thereby reducing transaction
costs and investment risk.
• Minimizes uncertainty to investors, and therefore risk, regarding offset
project eligibility and the number of offsets generated by a given project
type.
• Administratively simple to implement once established.
Disadvantages of standardized assessments
• Can be costly and time-consuming to develop rigorous standardized
criteria and methodologies for the wide variety of potential project types.
• Accepts a certain amount of free-riders (i.e., non-additional tons) and
inaccuracy by generalizing additionality assessments and quantification
processes.
• Can limit the types of offset projects allowed in the market to only those
for which standardized criteria and methodologies can be developed.
• Can be difficult to account for different market and environmental
conditions in various regions and regulatory systems.
• Can be difficult to accurately account for leakage.
Hybrid Assessments
In their pure forms, project-specific and standardized assessments represent the
two ends of a spectrum that encompasses a broad range of possible combinations.
Most assessment methodologies used in the voluntary and regulatory markets are
what are known as hybrid assessments, combining elements of both project-specific
and standardized methodologies to balance the strengths and weaknesses of both.
The advantages and disadvantages of a hybrid approach depend upon the balance
struck between the two assessment methods.
Although standardized approaches are often advocated in principle, all approaches
will in reality be some hybrid of standardized and case-by-case assessments. The
assessment of offset projects entails a certain measure of project-specific analysis.
No two projects are exactly the same in every respect, and individualized expert
judgment is often required to ensure that reasonable and accurate estimations of a
project’s reductions are properly credited.
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As the carbon market matures, more organizations are publishing sector-specific
protocols for offset projects that utilize one or more of these approaches. Some
of these protocols include a step-by-step process of evaluating a GHG emission-
reduction project within a specific sector and generally include:
• Standards for determining additionality;
• Standardized factors and guidance for establishing a credible project
OQI supports the
baseline; and,
development of cost-
• Instructions on procedures for quantifying offset credits.
effective, robust, and
Offset protocols are currently available from regulatory bodies such as the Clean
flexible offset project
Development Mechanism and Joint Implementation program under the Kyoto
assessment tools that
Protocol, the Alberta Offset System in Canada, and the Regional Greenhouse Gas
provide a rigorous and
Initiative in the United States. Protocols are also available through a number of
voluntary offset programs and registries including: the California Climate Action
transparent framework
Registry, Environmental Resources Trust’s GHG Registry, and EPA Climate Leaders
for the evaluation of
Program.
offset projects.
Recommendation on Project Assessment Type
OQI supports the development of cost-effective, robust, and flexible offset project
assessment tools that provide a rigorous and transparent framework for the
evaluation of offset projects. Regulation should strive to integrate the transparency
and consistency of standardized approaches, while capitalizing on the flexibility
and adaptability of project-specific approaches. For this reason, OQI recommends
the hybrid approach to developing regulations for the assessment of offset project
additionality, baseline establishment, quantification, and crediting periods. We
believe that a hybrid approach strikes the best balance between transparency
and standardization, while taking into account the consideration of project-
specific circumstances. Emerging regulatory regimes should build on the existing
groundwork that has been completed at the regional and international levels, and
seek to design policy that incorporates the lessons learned from current activities,
while allowing for flexibility, innovation, and adaptation over time.
Ensuring Offset Quality: Integrating High Quality Greenhouse Gas Offsets Into North American Cap-and-Trade Policy
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I I. OFFSET POLICY DESIGN PRINCIPLES
AND RECOMMENDATIONS
This section presents the key high-level design principles OQI recommends for the
optimal incorporation of offsets into emerging climate change mitigation policies
at the state, regional, and federal levels.
Regulatory Offset Programs Should Ensure High Environmental Integrity.
Environmental integrity—defined as the achievement of real, measured reductions
in emissions—should be the primary objective of any offset policy.
Regulatory Offset Programs Should Be Accurate. Quantification and baseline
assessments should strive to be accurate in the accounting and calculation of GHG
emission reductions. Methodological selection should be conservative to ensure that
offsets are not overestimated and uncertainties are reduced as far as practicable.
Regulatory Offset Programs Should Ensure That Offsets are Not Double
Counted. Only one ton of offset credit should be created by one ton of GHG
reductions, and this credit should only be allowed to count once towards any GHG
reduction requirement.
Regulatory Offset Programs Should Include Multiple Greenhouse Gases. GHG
regulation should, at a minimum, cover all six categories of greenhouse gases
identified by the Intergovernmental Panel on Climate Change (IPCC): carbon
dioxide (CO ), methane (CH ), nitrous oxide (N O), perflurocarbons (PFCs),
2
4
2
hydrofluorocarbons (HFCs), and sulphur hexafluoride (SF ).
6
Regulatory Offset Programs Should Include Broad Sector Coverage. Offset
policy should be designed to take advantage of a wide variety of emission reduction
opportunities in uncapped sectors where acceptable standards of offset quality can
be met.
Regulatory Offset Programs Should Not Restrict Offset Eligibility by
Geographic Source. Because GHGs accumulate both uniformly and globally
in the atmosphere, the location of an emission reduction is immaterial to its
climate change impacts. To capture the most cost-effective emission-reduction
opportunities first, regulations should not place limits on the location of offset
projects based solely on geography. For example, there may be political pressure to
incentivize domestic offsets through geographic limits; however, many of the lower-
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cost emission-reduction opportunities located internationally could be foregone if
these limits are implemented in future regulatory systems. OQI recognizes that
offset projects can have important local impacts and co-benefits, and regulation
should be designed to ensure that these non-GHG considerations are adequately
addressed, while recognizing the global nature of GHG emission impacts.
Forward Crediting
Regulatory Offset Programs Should Establish Reasonable Offset Crediting
vs. Foward Selling
Periods. The crediting period is the time during which a specific offset project
Forward crediting and
is eligible to generate and sell offset credits. These periods are intended to reflect
the duration for which a project is considered to be additional. The period length
forward selling are distinct
can vary depending on the project’s type or sector, and the period can range from
activities that are often
as little as two years to as many as 100 years. (Generally, project crediting periods
confused.
greater than twenty-five years are used only for sequestration projects, in which
carbon dioxide is removed from the atmosphere over many years.) Predefined
Forward crediting is
project crediting periods send important market signals to project developers and
defined as the issuance
other market participants, but regulators will have to carefully assess the relative
of tradable offset credits
merits of different crediting periods on various project sectors and types when
before the actual emission
crafting offset rules.
reduction occurs and is
One way of ensuring that project crediting periods accurately reflect a project’s
verified.
additionality is through the use of multiple crediting periods. Regulation can
Forward selling is defined
establish an initial crediting period (generally between five and ten years), and
as the sale of rights to
upon completion of the first crediting period, project proponents may apply for a
second (usually equivalent) crediting period. At this time, program administrators
future emission reductions
can reassess the project against current market conditions and determine whether a
in advance of an offset
subsequent crediting period is appropriate. Multiple crediting periods are employed
project’s implementation,
in both the Clean Development Mechanism under the Kyoto Protocol as well as in
or occurrence of the GHG
the Regional Greenhouse Gas Initiative in the United States. 3
emission reductions.
OQI recommends conservative, multiyear, and potentially renewable crediting
periods that provide certainty to market participants and regulated entities, which
will be critical to market development in the early years of a regulatory program.
Regulatory Offset Programs Should Exclude Forward Crediting But Allow
Forward Selling. Forward crediting and forward selling are distinct activities that
are often confused. Forward crediting is defined as issuing tradable offset credits
before the actual emission reduction occurs and is verified. OQI believes that credits
should only be issued on an ex post basis after reductions have been verified, and
thus forward crediting should not be allowed.
3 Under the Regional Greenhouse Gas Initiative all project types, except afforestation, are eligible
for an initial ten-year crediting periods with the option to reapply for a second ten-year period.
Afforestation projects are eligible for a sixty-year crediting period.
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In contrast, forward selling of offset credits is the sale of rights to future emission
reductions in advance of the project’s implementation, or occurrence of the GHG
emission reductions. Forward selling can provide critical upfront capital and
assurances of salability for project developers. For projects in which reductions
accrue over long periods of time (such as forestry and other sequestration projects),
forward selling can be the deciding factor in a project’s implementation.
OQI supports allowing market participants to forward sell when necessary, and
recognizes that such activity cannot be easily controlled or regulated. The purchase
of forward sold offsets credits is essentially a price-risk-hedging mechanism.
However, the purchasing entity should not be allowed to use the credits to meet
GHG reduction requirements until those credits have been delivered, verified, and
registered with the appropriate entity.
Regulatory Offset Programs Should Avoid Quantitative Restrictions on Offset
Supply and Use. There are strong economic and environmental arguments against
limiting the use of offsets to achieve emission-reduction mandates; the most
important of which is that the location of an emission reduction is immaterial to
its impact on global GHG levels. At the same time, legitimate concerns exist that
technological change will not be properly incentivized in capped sectors if large
amounts of offsets from other sectors are allowed. OQI believes these concerns
should be weighed against the advantages of high quality offsets, which include
access to more cost-effective GHG reductions and the promotion of technology
change in uncapped sectors. In fact, by lowering the cost of the total system, the
use of offsets could allow for the implementation of a more stringent cap, which
would result in even greater emission reductions in both the near- and long-term.
Therefore, OQI recommends against the use of quantitative offset restrictions.
If a quantitative restriction on offsets is nonetheless desired by policymakers, careful
consideration should be given to how and where that limit is imposed in order to
avoid undue market distortion.
There are two primary types of limiting mechanisms currently being considered
by policymakers: usage limits and supply limits. Usage limits restrict the number
of offset credits that are eligible for use in meeting emission-reduction targets (this
is most commonly expressed by a percentage of the total emission reductions or
entity-level emission reduction requirements that can be met through offsets).
Supply limits establish a predetermined number of offset credits that are issued in
a given compliance period. Regardless of the number and type of offset projects
available in the larger market, only those that were able to obtain credit through the
regulatory supply program would be eligible for compliance use.
Supply limits would not provide investment certainty to project developers and
could be problematic for those projects that have a multiyear crediting period,
particularly if projects must reapply for crediting approval on a yearly basis.
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Moreover, a limit on the available supply of eligible offset credits for use in a
compliance system could have significant price implications as regulated entities
compete for the limited pool of offset credits set by the supply limit.
OQI does not support the use of quantitative limits on the use of offsets. If a limiting
mechanism is established, a usage limit is less likely to disrupt the market than a
supply limit, as it creates a broader supply from which regulated entities can draw
and provides more certainty to project developers. Limitations on offset usage will
Definition of
likely result in lower-cost offset credits when compared with offset supply limits, as
Usage Limit
supply would not be artificially constrained and the market would have adequate
liquidity.
A restriction on the
number of offset credits
Offset credits in excess of those allowed for compliance through limiting mechanisms
eligible for use in meeting
could potentially be sold into the voluntary market or to international compliance
emission reduction targets.
markets.
Usage limits are most
commonly expressed by
Policymakers must weigh a range of factors when considering establishing
a percentage of the total
limiting policies such as supply, usage, and geographic restrictions on offset use
for compliance. In general, policy should be crafted to distort the market as little
emission reductions or
as possible, and to ensure that emission-reduction goals can be met in the most
the entity-level emission
efficient, credible, and cost-effective manner possible.
reductions requirements
that can be met through
Regulatory Offset Programs Should Be Transparent. The standards and
offsets.
processes governing offset projects should be developed and implemented in an
open and transparent manner and well-defined in regulation in order to ensure
Definition of
credibility and reduce uncertainty for investors. Similarly, offset project assessment
Supply Limit
activities should be open and transparent, except where legitimate and significant
The establishment of a
confidentiality issues exist.
predetermined number of
Regulatory Offset Programs Should Incorporate Hybrid Offset Project
offset credits that may be
Assessment Methodologies. All potential offset projects must be assessed both to
issued (issuable) in a given
determine their eligibility and to establish a means of quantifying the reductions.
compliance period.
OQI supports the development of cost-effective, robust, and flexible offset
project assessment tools that provide a rigorous and transparent framework for
the evaluation of offset projects. OQI believes that a hybrid of project-specific
and standardized methodologies to address additionality, baseline establishment,
quantification of emission reductions, and setting of crediting periods will strike
the best balance between administrative simplicity and quantification certainty,
while taking into account the consideration of project specific circumstances.
Emerging regulatory regimes should build on the existing groundwork that has
been completed at the regional and international levels, and seek to design policies
that incorporate the lessons learned while allowing for flexibility, innovation, and
adaptation over time.
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Regulatory Offset Programs Should Allow for Adaptation and Adjustment.
GHG emission-reduction systems should be flexible yet comprehensive. Changes
in the overall program design, as well as details of assessment protocols for different
project types, should be evaluated and incorporated regularly to ensure the envi-
ronmental integrity and effectiveness of an offset mechanism. Policy and regulato-
ry reviews should occur at long enough intervals to allow for investment certainty.
Offset Program
Except under extreme circumstances, policy changes should not be applied retro-
Linkage
actively or without ample warning, in order to avoid leaving market participants
Where practical, emerging
with stranded investments that were made in good faith under existing rules.
regulatory regimes should
be designed to be as
Regulatory Offset Programs Should Include a Mechanism for the Addition of
compatible as possible with
New Project Types. Offset programs should allow and encourage the development
other existing and emerging
of new offset project standards and protocols for new and innovative offset project
regimes, both domestically
types, and include a mechanism for their incorporation into the program on an
and internationally (as long
ongoing basis.
as those regimes have high
Regulatory Offset Programs Should Have a Centralized Offset Program
environmental integrity).
Administrator. OQI recommends the establishment of a centralized authority
that will administer and implement an offset program. This authority should have
the ability to make necessary decisions and should be capable of doing so in a
timely and transparent fashion. In regional contexts, which involve the linking of
multiple jurisdictions into a single offset program, a centralized authority should,
at a minimum, have a strong coordination role to ensure comparable decisions
are made regarding the program’s administration and implementation across the
participating jurisdictions.
Regulatory Offset Programs Should Link With Other GHG Trading and Offset
Systems. Where practical, emerging regulatory regimes should be designed to be as
compatible as possible with other existing and emerging regimes, both domestically
and internationally (as long as those regimes have high environmental integrity).
In particular, mitigation policies should build on and enable linkage with the
international frameworks already in place. Offset standards and markets should
work towards the recognition of a globally fungible offset credit commodity, which
will increase global liquidity and market efficiency.
Regulatory Offset Programs Should Consider Diverse Geopolitical Contexts
When Designing Offset Provisions. Economic and political development and
other country-specific circumstances should be considered when developing offset
policy, particularly with regard to additionality criteria and quantification protocols.
Offset standards that recognize the different circumstances from which projects
originate are essential. At the same time, this flexibility should not be allowed to
compromise the environmental integrity of mitigation policies.
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Regulatory Offset Programs Should Allow Both Offset Projects and Programs of
Activities. OQI recommends that both projects and “programs of activities” (PoAs)
should be eligible to generate offset credits. Projects include single-site projects that
are awarded credits for reductions resulting from actions on that site, while a PoA
includes many small reduction projects that are dispersed over a larger geographical
area, such as the implementation of a similar GHG reducing technology across
multiple sites in a county or state. Emission reductions from a PoA can then be
aggregated, which can assist in obtaining financing for small-scale projects that are
easily replicated. For example, the installation of an auxiliary power unit (APU)4 on
a fleet of trucks owned by multiple entities could be considered a PoA.
Regulatory Offset Programs Should Establish a Reasonable Start Date for
Offset Project Crediting. The project crediting start date is the date from which
offset projects are eligible to generate and be awarded offset credits. This date
has important implications for project investors wishing to act in advance of
regulation. Ideally, the project crediting start date would be set such that legitimate
early actors are recognized for their pre-regulatory activities, while not awarding
excessive credits for activities that potentially would have occurred regardless of the
expectation of a GHG regulation. OQI recommends that the start date for project
crediting be set at least three to five years in advance of emission allowance issuance
from a new regulatory regime.
Regulatory regimes should also consider separating the issue of offset credit
issuance from the issue of start date of the offset project. For example, an eligible
project that began in 2005 might only be eligible to sell offset credits from the
time a program came into effect, e.g., 2008. The total allowable offset crediting
period for that project type would be the regulatory standard for an initial crediting
period; emission reductions that occurred prior to the regulatory program’s
implementation would not be credited, but could be eligible for use in a voluntary
market.
4 Auxiliary power units are power generating units installed on long haul trucks or freight trains that
provide an alternative source of power during stops and mandated layover periods.
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IV. GHG REDUCTION PROJECT
CATEGORIES AND CONSIDERATIONS
Introduction and Recommendations
The universe of GHG emission-reduction projects encompasses a wide variety of
project types and activities, ranging from the installation of methane digesters, to
fuel switching in the industrial and transportation sectors, to renewable energy
and energy efficiency measures. Generally speaking, all GHG reduction projects fall
into three distinct categories:
• Direct emission reductions (projects that occur at the project site)
• Indirect emission reductions (projects that cause an emission reduction to
occur at a location other than the project site)
• Sequestration (projects implemented through an activity that removes and
stores carbon dioxide or other GHGs from the atmosphere, or avoids the
release of stored carbon into the atmosphere)
Broadly speaking, OQI believes that direct emission-reduction projects at facilities
not covered by a cap-and-trade program are best suited for use in a regulatory
offset program.
We believe that indirect emission-reduction projects are best incentivized through
complementary policy measures and alternative funding mechanisms. This is due to a
variety of reasons that range from difficulty in establishing credible baselines for certain
project types, to challenges in establishing clear ownership over emission reductions
(see below). However, many of the most important indirect emission-reduction
opportunities lie in the energy efficiency and renewable energy sectors; if these sectors
are disallowed or significantly restricted from participating in the regulatory offset
market, alternative incentive mechanisms must be established and deployed. 5
5 OQI believes that while indirect emissions reductions are not appropriate as high quality offsets, a
high priority should nonetheless be placed on funding and encouraging the wide scale deployment
of renewable energy and energy efficiency projects. Mechanisms such as allowance set-asides in cap-
and-trade systems for existing and new renewable plants, aggressive Renewable Portfolio Standards,
and tax credits or feed-in tariffs are all appropriate means of stimulating the wide-scale deployment
of renewable energy.
Similarly, energy efficiency is one of the most cost-effective and significant sources of GHG reductions
in the near to medium term, and OQI believes it should be strongly incentivized through a combination
of regulation and market-based incentive programs. Mechanisms such as demand-side management,
energy-efficiency standards, energy efficiency certificate mandates, and a low-interest government
revolving loan fund are all appropriate means of stimulating energy efficiency.
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Finally, OQI believes that biological sequestration is a vital category of mitigation
opportunity, yet also recognizes the challenges inherent in integrating biologically
based sequestration credits into a regulatory offset framework. The GHG mitigation
community is actively engaged in developing mechanisms to address the challenges
posed by biological sequestration projects (see the following section). OQI is
GHG Emission-
optimistic that appropriate policy mechanisms and program design criteria can be
Reduction Project
put into place to ensure that biological sequestration activities can play a credible
Categories
role in the offset market. OQI intends to further evaluate this issue and to develop
a more detailed set of recommendations in the future.
Direct
The following section presents the various types of GHG reduction projects in more
Emission reductions that
detail and evaluates their potential role in offset policy. OQI has focused on GHG
occur at the same location
reduction projects located within the United States, and the analysis presented
the reduction activity is
here is reflective of current U.S. market conditions. Offset project eligibility should
implemented.
be evaluated in the context of the regulatory and political circumstances of the
jurisdiction in which a particular project is located.
Indirect
Direct Emission Reductions
Emission reductions that
occur at a location other
Direct emissions reductions occur at the project site. Examples include:
than the location or place
• The substitution of higher GHG emitting fuels with lower GHG emitting
a reduction activity is
fuels
implemented.
• Operational improvements at industrial facilities that reduce onsite
consumption of fossil fuels
Sequestration
• The installation of idle-reduction devices on heavy duty equipment such
The sequestration of GHGs
as semi-trucks and trains
is defined as an activity that
• The capture and destruction of GHGs at landfills, agricultural operations,
removes and stores carbon
and coal mines.
dioxide or other GHGs from
the atmosphere, or avoids
Direct emission-reduction projects are the simplest and most straightforward to
the release of stored carbon
incorporate into an offset program. These reductions tend to be the most easily
into the atmosphere.
verified because the emission reductions occur on-site, have a clear boundary, and
can be most easily quantified. When emission reductions occur at a project site,
there is also little risk that an entity other than the project developer will claim
ownership of the reduction, thus these projects are unlikely to face the potential
double counting of emission reduction benefits.
For these reasons, OQI recommends that direct emission reductions should be the
preferred source of offset credits for regulatory regimes.
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Indirect Emissions Reductions
Indirect emissions reductions occur at a location other than the project site.
Examples include:
• Energy efficiency and renewable energy projects that cause power plants to
generate less electricity and thereby emit less carbon dioxide.
• Material displacement that avoids emissions, e.g., the use of fly ash in
concrete that reduces demand for cement and lowers cement sector
emissions.
The fact that the actual emissions reduction occurs somewhere other than the
primary project site has important implications for the ownership of, and claims
to, indirect reductions. Offset credits must represent a clear property right, and
sellers must therefore hold unambiguous legal title to the associated GHG emission
reduction in order to prevent multiple parties from making claims against the same
reduction. With indirect emission reductions this delineation becomes muddled,
as the right to the reduction could be double counted, or claimed twice—once by
the project implementer and again by the entity that is actually producing fewer
emissions.
Frequent examples of this occur in the electricity sector, where the majority of
indirect reduction projects take place, either through the implementation of energy
efficiency measures or through the addition of renewable energy to the grid. Energy
efficiency and renewable energy projects can result in emission reductions in one
of two ways: they can reduce the generation output from existing fossil fuel power
plants on the grid to which the project is connected, or they can reduce the need to
add fossil-fueled generating capacity to the grid in the future.
However, the interconnected nature of the U.S. electricity grid makes it virtually
impossible to determine where particular electrons were generated, and thus offset
buyers and sellers cannot accurately determine which power generating units were
affected by the implementation of an indirect emission-reduction project. In a
regulatory regime in which the electricity sector is capped, the inclusion of offsets
from indirect emission-reduction projects could thus lead to double counting—
once by the project implementer and again by the fossil-fueled generator that
is under an emissions cap. While this example focused on the electricity sector,
all indirect emissions-reduction projects face similar concerns regarding double
counting and ownership, regardless of sector.
Due to these concerns, OQI does not recommend that indirect reduction projects be
approved to generate offset credits for use in a cap-and-trade system in the United
States, except where the double counting and ownership issues are resolved.
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Biological Sequestration of Greenhouse Gases
The sequestration of GHGs is defined as an activity that removes and stores carbon
dioxide or other GHGs from the atmosphere, or avoids the release of stored carbon
into the atmosphere. Biological sequestration projects are the most common and
occur through natural processes that remove carbon dioxide from the atmosphere.
Forests, grasses, and rangelands all sequester carbon and can be eligible to generate
offset credit when they meet established criteria. Examples of biologically based
emission sequestration projects include:
• The cultivation of new forests and/or grasslands
• Managing forests to increase sequestration
• Changes in farming practices, such as soil management activities 6
Avoided emissions is a subcategory of biologically based emission reductions.
Terrestrial ecosystems store large amounts of carbon that can be emitted as a result
of activities such as deforestation and certain agricultural practices. Incentivizing
activities that avoid the release of sequestered carbon has emerged as an important
component of comprehensive climate change policy. Examples of projects that can
avoid the release of sequestered carbon include:
• Avoiding deforestation that occurs when land is converted to other uses
such as development and agriculture
• Changes in agricultural practices to reduce soil disturbance from tilling
and other activities
Biological Sequestration and Offsets:
Considerations and Options
Considerations
There are three primary challenges in generating offset credits from biological
sequestration projects:
• Baseline establishment
• Permanence
• Leakage
Baseline Establishment. Emission reductions are calculated and credited relative
to an emissions baseline. Biological systems, particularly forests, are dynamic places
with constant fluctuations of carbon sequestration levels over their lifetime, thereby
requiring approaches to baseline calculation that are equally dynamic. Models
and other established tools can assist in this effort, but determining baselines
for biological projects can be more complex, but still attainable, than for direct,
technology-based emission-reduction projects.
6 The Nicholas Institute for Environmental Policy Solutions. Harnessing Farms and Forests in the
Low-Carbon Economy: How to Create, Measure, and Verify Offsets. Duke University Press. Durham
and London. 2007.
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Permanence. GHGs removed or stored by biologically based projects can be
reversed, and thus there is a risk that they will not be permanent. In the case of
biological sequestration projects, the GHGs are sequestered in the biological matter
(e.g., wood, grasses, crops) only until the matter decomposes or is combusted.
Forestry-based offset projects face both intentional (land conversion, harvesting)
and unintentional (wildfire, disease) permanence risks. For example, if there is
a wildfire, some of the carbon sequestered in the forest would be released into
the atmosphere and a portion of the offset credits could be negated. Program
administrators should proactively develop ways to address and mitigate the risk
associated with these types of projects, including establishing legal mechanisms
(e.g. conservation easements, deed restrictions) to address intentional reversals and
other policy mechanisms (e.g. reserve pools, buffer accounts, insurance) to address
unintentional losses.
While some advocate a special “temporary offset” category for certain types of
potentially non-permanent emission reductions, OQI recommends against this
approach due to its barriers to inter-market fungibility, additional administrative
requirements, and movement towards a globally tradable and credible commodity.
OQI believes that if sufficient assurances and measures are in place to ensure
replacement of offset credits in the event of project reversal, offset credits sourced
from projects that face permanence issues should be treated as any other reduction
that meets the applicable offset eligibility requirements.
Leakage. Leakage is defined as an increase in emissions outside of a project’s
emissions accounting boundary that occur as a result of the project. Avoided
deforestation and conservation forest management projects are commonly faced
with the issue that deforestation could merely be shifted to another area to produce
the needed amount of wood, thereby negating the environmental benefit of the
offset project. It is possible to provide mechanisms, such as inventory reporting, to
identify and mitigate potential leakage that might occur. Reforestation/afforestation
projects are less likely to be affected by potential leakage impacts.
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Options
OQI recognizes the challenges inherent in integrating biologically based
sequestration credits into an offset framework. However, we believe that biological
sequestration, particularly avoided deforestation, is a vital category of mitigation
opportunity. Moreover, the GHG mitigation community is actively engaged in
developing mechanisms to address the challenges posed by biological sequestration
projects. A range of policy options to address these issues has begun to emerge,
including:
• Insurance and bonding mechanisms to secure funding for replacement
tons in the event of underperformance or reversal.
• Buffer accounts that provide additional reductions that can be tapped in
the event of underperformance or reversal.
• Strict covenants and easements on the use of land and forested areas, as
well as long-term leases.
OQI is optimistic that appropriate policy mechanisms and program design criteria
can be put into place to ensure that biological sequestration activities can play a
credible role in the offset market. OQI intends to further evaluate this issue and to
develop a more detailed set of recommendations in the future.
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APPENDIX
The Offset Quality Initiative
The Offset Quality Initiative (OQI) was founded in
November 2007 to provide leadership on greenhouse
gas offset policy and best practices. OQI is a
collaborative, consensus-based effort that brings together the collective expertise of
its six nonprofit member organizations: The Climate Trust, Pew Center on Global
Climate Change, California Climate Action Registry, the Environmental Resources
Trust, Greenhouse Gas Management Institute, and The Climate Group.
The four primary objectives of the Offset Quality Initiative are:
• To provide leadership, education, and expert analysis on the issues and
challenges related to the design and use of offsets in climate change policy
• To identify, articulate, and promote key principles that ensure the quality of
greenhouse gas emission offsets
• To advance the integration of those principles in emerging climate change
policies at the state, regional, and federal levels
• To serve as a source of credible information on greenhouse gas offsets,
leveraging the diverse collective knowledge and experience of OQI members
OQI Member Organization Profiles
The Climate Trust
The Climate Trust is a nonprofit organization founded in 1997.
The Climate Trust’s mission is to promote climate change
solutions by providing high-quality greenhouse gas offset
projects and advancing sound offset policy. The Climate Trust
has directed $8.8 million in funding into 16 offset projects that
are expected to offset nearly 2.6 million metric tons of carbon dioxide. As one of
the oldest nonprofit GHG offset providers in the United States, The Climate Trust
brings its unique perspective to policymakers at the state, regional, and national
levels. The Climate Trust initiated and leads the Offset Quality Initiative.
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Pew Center on Global Climate Change
The Pew Center on Global Climate Change was
established in 1998 as a nonprofit, nonpartisan,
and independent organization dedicated to
providing credible information, straight answers, and innovative solutions in the
effort to address global climate change. The Center engages decision-makers at the
federal, state, regional, and international levels to achieve its goals for mandatory
federal climate change policy and a post-2012 international climate agreement.
The Center’s Business Environmental Leadership Council (BELC), a group of 42
mainly Fortune 500 companies with over $2 trillion in combined revenue, is the
largest U.S.-based association of corporations committed to advancing mandatory
policy and business solutions to address climate change. The Pew Center is also a
founding member of the influential U.S. Climate Action Partnership.
California Climate Action Registry
The California Climate Action Registry is a private nonprofit
organization committed to solving climate change. It serves as a
voluntary greenhouse gas (GHG) registry for entity-wide emission
inventories, which was its originally mandated purpose when it was
formed by the State of California in 2001. The California Registry
also establishes standards for GHG emission-reduction (offset)
projects. Through its Climate Action Reserve program, it adopts protocols for
quantifying and verifying offset projects. The Climate Action Reserve also accredits
and oversees independent verifiers and tracks the transactions of project offsets.
The accuracy, transparency, and integrity of all of the California Registry’s standards
have earned it the reputation as a respected and internationally recognized leader
in climate change issues.
Environmental Resources Trust
The Environmental Resources Trust (ERT), a business unit of the
nonprofit Winrock International, is a leader in emerging markets
for greenhouse gas (GHG) emissions trading. ERT operates the
GHG Registry®. The GHG Registry is the oldest online platform in
the world for international carbon trading and is the largest, non-
government registry in the U.S. for tradable carbon offsets, with ~20 million tradeable
offsets registered. In 2007, the GHG Registry facilitated the trade of 1.2 million offsets
among GHG Registry member accounts, representing approximately 10 percent of U.S.
market share for tradeable offsets. To date in 2008, the GHG Registry has facilitated the
trade of 2.2 million offsets.
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Greenhouse Gas Management Institute
The Greenhouse Gas Management Institute
is a nonprofit organization focused on
training and education. The Institute’s
mission is to train and develop a global
community of experts with the highest standards of professional practice in
measuring, accounting, and managing GHG emissions; meeting the needs
of governments, corporations, and organizations large and small. The GHG
Management Institute is training individuals in GHG management and accounting,
as well developing programs to certify professionals who meet the highest standards
of expertise and ethical conduct. The Institute also hosts the GHG Experts Network.
With well over 1,000 participants, it is the largest network of such experts in the
world. The Institute and the Network, together, are building the army of experts
and professionals necessary for the development of a credible and robust GHG
emissions trading marketplace.
The Climate Group
The Climate Group is an independent, nonprofit organization
that works with government and business leaders to accelerate the
transition to a low-carbon economy. Its coalition of proactive leaders
—from government, business and NGOs—has demonstrated that the
emissions reductions needed to stop climate change can be achieved while boosting
profitability and competitiveness. Companies, states, regions, and cities around
the world are realizing there are significant economic as well as environmental
advantages of taking decisive action now. The Climate Group was founded in
2004 and has offices in the United Kingdom, the United States, China, India, and
Australia.
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The work of the Offset Quality Initiative is generously supported
by the Energy Foundation.
Appendix
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