All dressed up and nowhere to go? A California cap and trade update

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By Selene Castillo
21 September 2012 | To assist California in fulfilling the state’s Global Warming Solutions Act (AB 32) objective of reducing GHG emissions to 1990 levels by 2020, the state will begin its much anticipated cap-and-trade program regulating initially electric utilities and large industrial facilities in January 2013. During the program’s first year, the plan is to auction only 10% of credits, giving away the rest for free. Afterwards, the number of free carbon permits is expected to diminish annually, resulting in 50% of credits being auctioned by 2020. 
In late August, the California Air Resources Board (ARB) conducted a  mock GHG auction to test the system before the state’s marketplace officially launches with its first “real” auction. ARB officials reported the pseudo-bidding among roughly 150 emitting entities went smoothly. However, they stated ARB will not disclose trading volumes and prices to prevent affecting future actions – like the first actual auction coming up on November 14. 

But how many entities will turn up to take part when the big day arrives?
Market players say not to be surprised if participation in the initial auction is low – pointing out that, as of a notice sent out last week from the ARB, “Many covered entities have not initiated the user registration and account application process” for registering with the state’s Compliance Instrument Tracking System Service (CITSS). This process is the first of a few mandatory steps that entities are required to undergo in order to participate in November’s auction. 

Says one Cali-facing forest carbon offset developer, “The big question right now is ‘will everyone participate in November, or will no one?’ Given that there are no compliance offsets in place and the actual true-up period isn’t for several years, there’s just not a lot of incentive to participate.”
Indeed, though the ARB conducted its offset verifier and registry training from March-May of this year, it has not yet announced any accredited verifiers to audit projects generating reductions under one of the state’s  four compliance offset protocols. In the mean time, word has it that verifiers are informally filling up their calendars for compliance offset protocol audits as soon as ARB opens up the starting gate. 

This is particularly true of projects in the forestry sector, where developers report sitting on potentially millions of tons of sequestration in wait to be verified to compliance offset protocols – that is, if ARB has the capacity to move projects quickly through the system. Verifier Environmental Services, Inc.’s Janice McMahon says of the forest carbon offset supply outlook, “I don't think there will be a shortage, but it depends on how many projects can get through, and in what timeframe. Forestry is definitely more complex than the other protocols they've approved.” 
Well timed for this discussion, last week, Finite Carbon and Downeast Lakes Land Trust (DLLT) registered the first Climate Action Reserve IFM carbon project outside of California in Maine. Finite Carbon says it intends to enter the  Farm Cove project into California’s offset project pool. 

During a recent webinar detailing the American Carbon Registry’s recently published  Compliance Offset Supply Forecast, presenters made the point that forestry (particularly IFM) has the potential to generate the largest volume of reductions of the three major protocols that also include ozone depleting substance (ODS) and livestock methane destruction. 
The truth of the matter is that the program is still in its very early stages although it’s been in the works since 2006. In its first “go” at a real auction, participation and supply levels may not align with initial expectations – but that should not be taken as representative of the potential success of the program overall. It’s a long road to November 14 and an even longer one to 2020. We’ll keep you posted!