Originally posted 15 September 2008 | "Ten states, from Maryland to Maine, are already implementing their own regional cap and trade, undertaking the nation's most serious effort yet to tackle climate change," said US Congressman Lloyd Doggett on Thursday, as he opened committee debate over his own proposed federal cap-and-trade legislation – one of several kicking around Capitol Hill this fall.
"And California has joined six other states and four Canadian provinces in a similar effort," he added – reminding us that schemes are in the works well beyond Washington, DC, and that federal lawmakers will be keeping an eye on regional developments as they forge a federal regime.
Pre-compliance trading for the ten-state Regional Greenhouse Gas Initiative (RGGI) started in February and has scheduled the nation's first auction of greenhouse gas emission allowances for September 25, with a compliance period that begins in January, 2009. At the same time, the agency overseeing implementation of California's AB 32, the state's Global Warming Solutions Act passed in 2006, is to complete an implementation plan this fall.
RGGI itself provides a framework within which states draft specific regulations, says Sarah Woodhouse Murdock, Boston-based eastern US region climate change program manager for the Nature Conservancy.
Some states, however, are still in the process of finalizing their rules and regulations within the RGGI framework, she says, adding that only a handful will be ready in time for this month's auction.
Another auction is slated for December.
"Hopefully by December most all of the states will be ready to participate," she says.
The initiative created five offset categories that would be recognized under the program, and afforestation (or tree-planting) is one of them.
The others are methane capture, capture of emissions from transmission lines, agriculture waste digestion and green building initiatives that result in more efficient use of natural gas.
Despite the inclusion of afforestation offsets, however, developers of forestry projects have virtually ignored RGGI and are focusing on the California initiative – for a variety of reasons.
To begin with, there's a perception that RGGI has simply allocated too many allowances.
"It's a repeat of EU ETS I (the first round of the European Union's Emissions Trading Scheme), where governments gave away more allowances than there were emissions," says one European project developer.
Then there's the fact that the Northeast has already reforested large swathes of previously degraded land, leaving little room for afforestation projects. States outside the RGGI region can host offset projects and sell those offsets into the RGGI states, but in order to do that the outside states have to sign a memorandum of understanding with a RGGI state, Murdock says.
"That hasn't happened yet, and it is not 100 percent clear what exactly needs to be in that MOU," she adds, describing the lack of clarity as "probably an administrative oversight."
The afforestation rule includes baseline requirements along with specifications for additionality, permanence and other details. "Each state adopted that model rule," Murdock says. "There was no flexibility in the offset provisions for the states. It was kind of an up or down for them. That made sure that each state's rules on the offsets were consistent with each other."
are not recognized under the RGGI scheme – mainly because North American forests are largely protected already, and drafters felt they couldn't meet the additionality requirements.
The state of Maine's Department of Forestry, however, has requested the inclusion of offsets generated from active forest management, reduced impact development, biomass plantations, and afforestation on urban and community lands into RGGI in the future.
"While the opportunity for these other three project types may be more limited, we believe they provide a valid offset mechanism and should be considered," the department said in a joint statement issued by Environment Northeast, the Manomet Center for Conservation Sciences, and the state's Department of Environmental Protection.
Ellen Hawes, forestry policy analyst with Environment Northeast in Portland, Maine, says about 50 stakeholders including academics, non-governmental organizations and industry have been working on a draft project protocol for forest management this summer and are hoping to present it to a RGGI's staff this fall.
"We're working on finalizing some of the details," she says. "We originally were planning on presenting it to the staff working group after the first auction. If we finalize the details with the stakeholders by mid-Ocotober we may submit it to them for an initial review."
Hawes says the staff does not expect to have time to probe deeply into the proposal and start developing necessary guidance or documentation until after next January. Subsequent to that, she says at least six to nine months will be required to work through details and take comments. The states involved would also have to amend their own RGGI legislation.
"They haven't given us a timeline, but it would be something of a lengthy process," she says, adding that the most detailed sections of the proposal have been developed for active forest management.
"We're working on coming up with more details on urban community forestry," she says. "We'd like to work out something for avoided deforestation. We've mentioned starting with reduced impact development but the level of detail on that is not quite as well developed as the forest management protocol."
Over-allocation isn't the only knock on RGGI. Critics also point to its narrow focus: only regulated electric utilities that generate 25 megawatts or more are included in the program and are eligible to use the offsets in meeting their emission allowance requirements.
Then there are limits on the amount of a regulated entity's emission reduction requirements that can be met through offset. RGGI includes an initial 3.3 percent limit on the amount of offsets that can be used by any one generator to meet its compliance obligations, but raises the ceiling as prices climb and other "trigger events" occur – which project developers say makes demand difficult if not impossible to project and sets the stage for violent downward price moves.
"It's essentially a market on training wheels," says Ricardo Bayon, a partner and co-founder of EKO Asset Management Partners (and former director of the Ecosystem Marketplace). "They've essentially set it up for only one sector – electricity – and they've set up a series of essential price caps on the market. So when the price is X there is a small amount of offsets allowed. If the price goes up more offsets are allowed. And if the price goes up further even more offsets are allowed."
In simplest terms, the law describes two trigger events that can lead to more offsets being sold: one if the price hits $7 per ton in 2005 dollars, in which case offsets can be used to satisfy five percent of the compliance obligation; and another if the price hits $10 per ton in 2005 dollars, in which case offsets can be used to satisfy ten percent of the compliance obligation and other criteria are relaxed.
In actual fact, it's more complicated than that, and RGGI has set up a
summarizing the trigger events and other aspects of the scheme.
"Everybody wanted the price to be low," says Bayon. "It is basically a market that has been hampered by all kinds of regulatory worries about the price of a credit. That, I think, is part of the reason why a lot of the key market players are paying more attention to California than they are to RGGI."
Murdock doesn't dispute the impact of low or volatile prices on project developers, but says the sliding scale isn't the problem. Indeed, most programs under development have a limit on the percentage of an emitter's allowances it can meet through offsets, and she says the sliding scale doesn't add much to the price risk that forestry projects already face, and ceases to be an issue once prices have passed the second trigger point – which will only happen if allocations are properly managed.
If allocations are too generous, then prices will never reach a level where afforestation offsets are viable, she says.
"Are there any afforestation offsets at below $5 a ton?" she asks. "We did do a study of that and our answer to that … was that there are very, very few afforestation offsets at that price within the RGGI region."
In pre-compliance trading, prices have barely managed to breach the $5 per ton level – which is even lower than offsets from many voluntary projects.
The Nature Conservancy is also actively monitoring and working with California on its implementation of AB 32 – a scheme that has also garnered more attention from project developers, even though it is still in development.
"There was a recognition of the important role that forests play in climate policy, and there was a place for them in that bill," says Louis Blumberg, San Francisco-based director of forest and climate change policy for the group.
"Overall, I'm optimistic that there will be a robust role for forests in general in the state," he adds. Based on the preliminary draft plan released in June "it looks like there will be – you can't say for certain because the plan was very general – but it looks like there will be offsets."
Last October, the California Air Resources Board (ARB), which is responsible for the implementation of AB 32, also adopted forest project protocols developed by the California Climate Action Registry for voluntary early options.
"To me that's a good sign that there will be forest carbon projects as part of the cap and trade offset program in AB 32," Blumberg says.
Bayon notes that anybody involved in a forestry project under the registry protocol will "essentially get early action credit in the system they set up down the line."
California, in contrast to RGGI, involves all gases and all sectors in its climate change effort, and the targets they have set are much more aggressive, Bayon says, adding, "The magnitude of the reduction required by AB 32 is far beyond anything we've seen anywhere. It is a huge reduction commitment."
Analysts with Deutsche Bank AG in Paris have just released a report concluding the California legislation makes the state a global leader on climate change. They predict it will result in a carbon price range of $15 a ton under a best-case scenario of abatement via offsets in the cap-and-trade scheme. A $60 per ton price would result from a base-case scenario of abatement via fuel-switching in the power-generation sector.
"California's approach to reducing emissions is holistic and innovative," says Mark C. Lewis, the bank's managing director for commodities research. "The extra flexibility the cap-and-trade scheme provides should ensure that the overall targets are delivered at minimum cost – provided the cap-and-trade scheme is allowed to dovetail seamlessly with the direct-control measures."
Blumberg, however, says that California's plan is still vague and "very general at this point. There is no real hard commitment in the draft plan." A final plan is expected to be released in this fall. The Nature Conservancy and other groups are participating in a comment and public meetings process in which Blumberg says his group is asking for more specifics and commitments from the board.
"They have indicated there will likely be some geographic limit on offsets, but they're not clear about that," he says. "And they have also indicated that up to 10 percent per capped entity might be allowed for offsets. They haven't committed but that's what they have said so far."
California officials have also said the state would be looking for the forestry sector to produce five million metric ton of emission reductions by 2020, which would be three percent of the total reductions anticipated.
"So there is that indication that forests are part of the state's plan and that's a good sign," Blumberg says.
"The protocol is there," adds Bayon. "It's a measurement mechanism of what does a forestry project look like. Anybody who wants to submit a project can submit a project. There's no limit. There are just standards that have to be met."
State officials have also mentioned that Mexico might be a place where offset projects would be allowed, albeit with some restrictions possible. The California plan has also talked about the possibility of linking the state's offset system to the 18-month-old Western Climate Initiative, which released a draft design for a regional cap-and-trade program in July but is not nearly as advanced as AB 32 or RGGI.
"I think we're going to ask them to go for unlimited offsets with no geographic restrictions," Blumberg adds, acknowledging that when a state is developing its own program some people believe the program should stay entirely within the state.
"We have a different view," he says. "We think that there is a role for international projects that is legitimate and that any project that produces a verifiable climate benefit with high standards should be included. So we'll see how they come down on that."
Project types expected to be included in the California implementation include reforestation or afforestation, avoided deforestation or forest conservation and approved forest management, he says. "There are three project types right now and they are working on an urban forestry protocol as well," he says.
The details on those project types are included in the California Climate Action Registry's 250-page document describing project base lines and requirements for developers. The Registry has been working on those requirements since 2001 and they are considered to be very robust, Blumberg notes.
The Registry also has an ongoing protocol workgroup that is looking at issues surrounding additionality, permanence, leakage and baseline definition.
"They are looking at all of these issues," Blumberg says. "We think they have been addressed very robustly, if you will, in the first round of the current protocol. But they are continuing to refine them, I think. So we'll see how that plays out."
California, Blumberg notes, is already demonstrating the viability of a forest carbon market for several forest project types. One of those is the Garcia River Forest project, which the Nature Conservancy is working on with the Conservation Fund. The Conservation Fund owns the land.
"We have reductions from that forest that have been verified to ARB approved standards by third party verification and authenticated by the California Climate Action Registry and those have been purchased wholeheartedly by the Pacific Gas & Electric Co. for their Climate Smart program," he says. "We think we are showing some of the international skeptics how it can be done here."
Blumberg and others said the federal climate change program may eventually be stronger than and preempt the state program. Bayon agrees.
"I'm frankly less concerned about RGGI because I think the long-term impact of California will be bigger than RGGI," he says. "And the real interesting thing is what comes out at the federal level in the end."
"What we've seen in California clearly indicates that the US will take a much different stance on forestry than the Europeans do," says Bayon. "Forestry offsets are already being allowed in California pre-compliant."
If the state did not have the California Climate Action Registry forestry protocols this might not be true, Bayon says. And if the recent language of the federal Boxer-Lieberman-Warner climate bill did not endorse forestry efforts, it might be a different story, he adds, while noting that the future of forestry in US climate change efforts is "very bright", especially when compared to the current climate change regime in Europe.
In Europe, Bayon notes, only 15 industries have been capped and RGGI is capping only electricity production. "California has gone further and says anybody who emits," he notes. "There are no limits."
Phil Burgert is a writer and editor based in Oak Park, Ill. He can be reached at philip.burgert(at)pipeline.com.
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