Forest carbon offset buyers to bear California’s invalidation risk

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By Gloria Gonzalez

After a series of delays, California regulators have approved several changes to their cap-and-trade program, including one that will make the buyers of carbon offsets from forestry projects responsible for replacing the offsets if the projects turn out to be problematic. The regulators also signed off on the adoption of a new coal mine methane protocol that supporters hope will expand the supply of available offsets.

April 29, 2013 | Since the launch of California’s cap-and-trade program, the buyers of forest carbon offsets have so far dodged a bullet faced by purchasers of other types of compliance offsets: the invalidation risk that could force them to replace problematic offsets. But the invalidation risk is one they will soon have to bear – or mitigate – as California regulators approved a change shifting the risk of invalidation for forestry offsets away from forest owners to the buyers.

The so-called buyers’ liability provisions of California’s cap-and-trade program allow the Air Resources Board (ARB) – the agency charged with overseeing the state’s regulated carbon market – to invalidate offsets found to be faulty or fraudulent and force regulated entities to surrender replacement offsets for compliance. The change – designed to ensure consistency as buyers of forest carbon offsets will now bear the same risk as buyers of offsets from other types of projects eligible for the California program – was approved by the ARB on Friday as part of a package of amendments that will become effective on July 1.

General support exists for the ARB’s efforts to ensure uniformity of the invalidation rules across all project types, but oil major Chevron had previously expressed concerns about shifting the invalidation risk for forestry projects in comments submitted to the ARB last year.

“I think the market has already absorbed the idea of buyer liability,” said Gary Gero, President of the Climate Action Reserve (CAR) – an offset registry that supports projects to reduce GHG emissions. “The project developers who develop forest projects, some of them also develop projects under the other protocols so there is a general understanding of that mechanism now and acceptance of it in some way. Many buyers continue to be unhappy about buyer liability, but I don’t think they saw that it was worth making those arguments again in the context of the forest changes.”

Market participants often blame the buyers’ liability provisions for a lack of liquidity in California’s offset market, although regulated entities can purchase an insurance policy to cover the risk. Julian Richardson, CEO of Parhelion Underwriting, a specialty insurer focusing on the climate finance sector, has previously stated his company would be ready to step in to insure forest carbon projects against the invalidation risk if the ARB implemented the change.

“The invalidation risk itself, I don’t think, is a big risk,” he said at the Navigating the American Carbon World conference in San Francisco last month.

California embraces coal mine methane offsets

Naturally cautious after major litigation challenges, the ARB has moved slowly in embracing new types of emissions reduction projects. But finally after years of lobbying from project developers, buyers and other stakeholders, the regulators have added a new project type to their roster of eligible offset protocols: mine methane capture.

The ARB announced on Friday that it has approved a new protocol that would generate compliance-grade carbon offsets from coal mine methane projects. ARB staffers have previously estimated that the protocol could produce a potential domestic offset supply of 60 million tonnes of carbon dioxide (tCO2e) in emissions reductions.

This project type joins forestry, urban forestry, livestock and ozone-depleting substances protocols originally developed in the voluntary markets as being eligible to produce offsets for entities regulated by the cap-and-trade program, with these project types allowed into the program in October 2011. The ARB sees emission reductions from carbon offset projects as a vital factor in achieving California’s ambitious goals to reduce its greenhouse gas (GHG) emissions to 1990 levels by 2020 and 80% below 1990 levels by 2050, set out in a landmark piece of legislation commonly known as AB 32.

The newly adopted protocol addresses the two primary sources of methane from active mining: methane released through ventilation shafts, and methane released from drainage systems. Emission reductions will be achieved through methane capture and use or destruction of methane from these sources. Reducing methane is critical because, over a 20-year span, it can warm the atmosphere more than 80 times as much as carbon dioxide, the ARB noted.

Consideration of the mine methane capture protocol had been delayed several times due to requests that the ARB further examine the protocol.

Pros and Cons

Holy Cross Energy, a non-profit, member-owned electric cooperative utility in Colorado, specifically cited the global warming potential of methane in urging the ARB to adopt the protocol earlier this month.

“This protocol will encourage the generation of new and accurate data of methane emissions from mines,” said Delvan Worley, CEO of Holy Cross, said in comments to the ARB. “This could encourage more research and measurement of methane emissions from all sources.”

But the ARB’s decision was not without controversy, as several observers objected based on the notion that adoption of the protocol would incentivize the development of major coal mining and natural gas extraction operations and lead to increased environmental degradation.

However, California utility Pacific Gas & Electric argued that these offset projects would not contribute to additional mining because of their small returns and because coal is an increasingly global commodity whose production is predominately influenced by market fundamentals. The investor-owned utility also reiterated that without an adequate supply of carbon offsets, the cost-containment benefit of offsets will not be fully realized.

General objections were also raised to the use of carbon offsets and trading mechanisms as a solution to address climate change. The ARB has previously been sued over the offset protocols allowed in the cap-and-trade program and although the ARB prevailed in court in January 2013, the ruling is under appeal.

“We need direct emissions reductions from GHG pollution, not market schemes for polluters to avoid their responsibility to emissions reduction,” said Mari Rose Taruc, State Organizing Director for the Asian Pacific Environmental Network, which supports California’s AB 32 goals. “We work with hundreds of families living next to oil refineries and other big polluters and want to see those emissions reduced to improve the ailing health of our communities and to combat climate change. We see no benefits for offsets.”

A rice cultivation offset protocol is the next one that could be adopted by the ARB, which is scheduled to consider the project type in September after multiple delays.