Read “Key Accounting Principles for Improved Forest Management Projects within the Forest Protocol” to gain a better understanding of how offsets are generated under the Forestry Project Protocol

Above Business as Usual: Offsets Now and Moving Forward

Carbon offsets represent greenhouse gas emissions reductions that have been achieved through voluntary implementation outside of capped sectors as a result of the financial incentives provided by the carbon market. The role of offsets continues to be an important, but sometimes contentious, strategy for addressing climate change. As an important cost-containment mechanism for compliance programs, offsets bring much-needed flexibility to avoid excessive price increases, yet some jurisdictions such as California (and others) have limited their role and geographic reach. In voluntary markets, offsets continue to offer an array of options for companies seeking to mitigate beyond their own operations, yet there can be pushback on the choices made. As the world contends with opportunities and responsibilities to address climate change, offset developers, registries, and regulators are pushing forward the compliance and voluntary offset markets, including emerging market opportunities, development of new offset protocols, actions to increase market uptake of existing offsets, and education surrounding misconceptions about offsets.

The North American Carbon World 2019 conference brought together a distinguished panel of speakers to address this topic. (video: https://www.youtube.com/watch?v=osNNHKrNl4c) Special thanks to Jon Costantino, Tradesman Advisors Inc; Chelsea Bryant, ClimeCo; Jason Gray, California Air Resources Board; and Max DuBuisson, Climate Action Reserve for sharing their insights.

Offsets are a financing tool driving significant emissions reductions

In California’s Cap-and-Trade program, compliance entities are currently able to meet compliance targets using offsets for up to eight percent of their emissions profile (this limit reduces to four percent during 2021-2025 and six percent during 2026-2030). In California, compliance offsets have resulted in the reduction of over 154.8 million metric tons of carbon dioxide equivalent (CO2e) emissions to date. Offsets in the voluntary market are used by companies, subnational governments and individuals outside of capped programs. An Ecosystem Marketplace analysis found that by 2018, voluntary carbon projects have helped to reduce, sequester, or avoid over 435.7 million tons of CO2e, which is equivalent to not consuming over one billion barrels of oil.

Private capital has played a key role in the historic success of offsets to achieve significant emissions reductions. Offset projects involve considerable costs for installation of best available technologies, project registration and monitoring, training of staff, and independent third-party verification. Billions of dollars of private capital have been driven into carbon markets, and market participants report seeing an expansion of investments into emissions abatement initiatives, especially in markets with strong regulatory leadership and robust ancillary services that help provide the protocols, resources, and guidance to support the creation of these environmental commodities.

“Roughly, the conservative estimate after subtracting out our buffer pool for forestry is about a billion and a half dollars in value for climate action that would not have otherwise occurred,” said Jason Gray, California Air Resources Board. “These all represent real, additional, permanent, verifiable, enforceable actions and reductions. Cleary more needs to happen, as the IPCC mentions in their recent report, in all different sectors, but this is one important financing tool that is robust, that’s actually representing real action.”

“In absence of incentivizing private capital to invest in these emission reductions, we’re simply not going to get there in terms of hitting the aggressive targets that we need to hit in order to mitigate climate change,” said Chelsea Bryant, ClimeCo.

Addressing the rumblings about offset credits

Offsets have faced opposition from environmental justice communities, which argue that offsets provide a loophole for polluters to continue emitting harmful pollution into communities as they pay for reductions elsewhere. More criticism occurred when a recent policy brief pointed to alleged calculation flaws in addressing leakage in forest carbon projects. And during the early years of offset program development, project failure – especially in communities with governments that appeased and condoned the willful violation of carbon offset project goals – hindered the integrity of the carbon market.

AB 398, the legislation to extend California’s Cap-and-Trade program beyond 2020, addressed environmental justice concerns over offsets by restricting usage limit in the California compliance program and creating a new provision that no more than half of the usage limit can come from projects that don’t provide direct environmental benefits (DEBs) to the state.

“There’s an additional benefit beyond the greenhouse gas emissions that are credited. The legislation defined that in terms of watershed benefits and air pollution benefits. Our assessment in the rulemaking was that the projects located in state are directly providing those benefits to the state beyond the GHGs that are credited. For projects located out of state, we are developing the process for what scientific information and evidence would need to be assessed to show a direct environmental benefit to the state,” said Jason Gray. “There’s a lot of questions on that so stay tuned. We will have some process to help walk people through that.”

In response to concerns about appropriate forest leakage calculations, Jason Gray explained, “Our protocols go through a robust public process where the best available information at the time of adoption and during protocol updates are assessed. In the protocol, we acknowledge that leakage is a complicated thing to assess. Our protocol assesses two different types of leakage – activity shifting leaking which relates to mill deliveries and timber, and market shifting leakage which relates to movement of wood projects. Our protocol is using the best available information to assess these two different types of leakage. The policy brief uses two studies that were quite unrelated to our protocol, they were conducted for a different purpose, makes some assumptions not using the leakage assessments that are in our protocol, misunderstands how we set baselines and how leakage is assessed, and develops a view that’s just really not comparable – an apples to oranges comparison. We’ll continue to get the correct information out and to continue to learn – so as there’s new information we’ll take that into account.

“We have over 100 forest compliance projects in 21 states. We have seven tribes throughout the United States, two Alaskan native corporations participating. And these projects (tribal and nontribal) are really resulting in a lot of cobenefits for habitat, biodiversity, and watershed protection.”

Risks for the offset market

Citing how a change in government leadership in Alberta ended the first carbon market in North America, which was a robust system that drove a lot of private capital into emissions reductions, Chelsea Bryant argues, “Regulatory stroke of pen risk is the single most important aspect when you look at investing into offset market and having a robust offset market. If you have regulatory stroke of pen risk, then people that invest millions of dollars in early action suddenly are the first ones to get aggressively burned. There’s always the concern of what stroke of pen risk would look like, what the next regulatory changes could look like, and then what are the implications to the market participants who’ve invested substantive resources and assets into these projects because again private capital is very concerned when you have the real significant stroke of pen risk that leads to the eradication of the underlying environmental attributes or their associated value.”

“The risk that most concerns me is if these programs aren’t working. The risk of not addressing emissions is the big risk here.” said Jason Gray. “We’ve learned a lot from experience and we are working to make sure we get the correct information out and make sure it’s understandable because it is a complicated program. That’s on us to make sure that the information risk is minimized so folks actually understand the protocols and the actions that are being taken.”

What to expect for offsets moving forward

“In terms of the compliance market, we’re interested to see over the next five to10 years as the cap starts to come down, is that going to start to put more pressure on the need for offsets, are we going to start to see prices coming up, is that going to expand the number of projects that are viable,” said Max DuBuisson, Climate Action Reserve. “On the voluntary side, I feel like we’re also seeing more activity and we’re seeing more interest. I think the pool of people that are potentially looking at offsets are getting bigger. We’re seeing more carbon neutrality interest from sectors like universities and cities. And we’re also seeing more interest in innovative approaches, not just going out and buying offsets but maybe finding projects that they want to partner with or insetting – looking within their own sphere of influence, and really trying to tell a story through the offset project.”

The opportunities for growth and expansion of offsets markets exist on several levels. There is much buzz over the potential for new protocols to be adopted, both for the compliance and voluntary markets – such as existing voluntary protocols for grassland and nitrogen management being adopted for compliance use or research and development into voluntary emissions reductions in biochar and adipic acid production. Existing protocols continue to be updated to help give more opportunities and new pathways for crediting. And registries and project developers are tapping into opportunities to expand into new geographies, including Mexico and Canada.

“The other focus for us in terms of offsets would be our neighbors to the north and south. We’re seeing a lot of excitement in Mexico. Under the Mexico Forest Protocol, we’ve now got six projects in the system. We’re having a lot of success with our staff going down and helping train the local community into supporting the projects, creating jobs in the community to support those projects,” said Max DuBuisson. “And we’re also working in Canada. Canada’s obviously had some ups and downs – and heartbreak for us, too. We were developing the Ontario protocols and the Ford administration came in and said to stop. But there was so much interest from the stakeholders that we have been able to continue the work in Avoided Grassland Conversion with the Canadian Forage and Grassland Association. And I hope it’s just the tip of the iceberg, especially because we started work on more than a dozen protocols so we’ve got a lot of half-finished files.”

Offsets have global benefits

Because greenhouse gas emissions have a global impact based on the total aggregate global emissions, the solutions to address greenhouse gas emissions can have a global viewpoint. Regulators work hard to balance the global benefits of offsets with the local benefits for immediate communities and environmental justice concerns.

“The purpose of offsets – at least in the regulatory program – is to address emissions that aren’t otherwise being addressed. How do you incentivize technology, incentivize action that is otherwise not occurring?” said Jason Gray.

Offsets expand the reach of compliance programs to sectors of the economy that aren’t directly regulated in order to find opportunities to address those emissions, jumpstart technological innovations in new sectors, and bring cobenefits to communities. Offsets also incentivize climate action in geographies that may not otherwise reward climate action, which is important when thinking of the climate crises from a global aggregate perspective.

“We have issued credits to projects in 35 states, which is quite an incredible climate diplomacy effort. Not all these states have robust climate programs, but this is an area where we’re actually able to engage with a lot of different people in a lot of different states on carbon mitigation,” said Jason Gray.

“California has developed such a wide suite of complementary policies to drive toward its emission reduction targets, while also creating conversations, memorandums of understanding, and helping to inform how other countries can do this – linkages, fungibility of instruments,” said Chelsea Bryant. “Without having jurisdictions like California who are demonstrating this type of environmental leadership, you would not have private investment to the same extent driving into these emission reduction projects, they would have no mechanism to monetize the emission reductions, to invest. You are now having them really set the blueprint and show other jurisdictions how you can design programs effectively, what works, what doesn’t work, and they can too adopt similar regulations and programs.”

Climate Risk and Responsibility

Climate risk and responsibility

Communities across the country and the world are already experiencing intensifying climate-related risks and extreme climate events. More severe and frequent fires, intense hurricanes, droughts and flooding are all becoming the new norm, wreaking devastation to life, property, and critical public infrastructure.

In 2018, the western US experienced its deadliest and most destructive wildfire season on record, fueling questions around who bears the responsibility and liability for climate disasters, what policies are necessary to mitigate and adapt to climate change, and how to overcome the challenges of cost, partisanship, and equity.

As climate risks grow, the impacts are being felt by a greater swath of communities and economic sectors, and there’s a growing understanding that opportunities for climate solutions lie within the full expanse of the economy, including sectors that may not have been traditionally associated with climate solutions, such as insurance and housing.

Speakers at the North American Carbon World 2019 conference addressed the future of climate risk and responsibility. (video: https://www.youtube.com/watch?v=3MDhaZTxRO8) Special thanks to Hon. Ricardo Lara, California Insurance Commissioner; Sean Hecht, UCLA School of Law; Annie Notthoff, NRDC; Jerry Schubel, Aquarium of the Pacific; and Chris Thompson, Southern California Edison.

Government

In this landscape of climate risk and devastation, our federal government has not been friendly to climate action. A New York Times analysis counts 83 environmental rules and regulations being rolled back in the current administration, which will result in increased air pollution, greenhouse gas emissions, toxic substances, and harm to health and ecosystems.

“All the action is at the state and local level now. They are really stepping up. Sometimes a vacuum actually invites action. Hostility out of Washington DC is now spurring action in Washington State, in Oregon, in Colorado, in New Mexico, in Nevada,” said Annie Notthoff, NRDC.

Engaging the insurance industry

“Insurance is a potential lever for addressing the causes and the impact of climate change in a bunch of different ways – insurers are powerful market actors in their investments. They also can create incentives to build resilience and reduce risk (as they have with many of our existing building codes), and they are key players in compensating victims,” said Sean Hecht, UCLA School of Law.

California is exploring creative and innovative opportunities to engage the insurance industry as a partner in fighting climate change. Ricardo Lara, the state’s Insurance Commissioner, has been working tirelessly to expand the scope of the insurance industry beyond thinking about just premiums and market solvency, to also think proactively about climate and environment.

“The insurance industry can continue to the be profitable but rethink the way they do business to protect our natural infrastructure and environment,” said Honorable Ricardo Lara, California Insurance Commissioner.

As an example of an innovative insurance industry solution, Lara points to Swiss Re’s insurance policy covering a 40-mile stretch of coral reef and connected beach in Cancun, Mexico. Local hotels and governments with a vested interested in tourism and habitat protection pay insurance premiums on the policy. If the reef system experiences damage or erosion, the policy holders can access millions from the insurance policy to restore and reforest of the reef immediately.

Role of utilities

The utility industry plays a key role in achieving emissions reductions and helping the state reach decarbonization goals. Southern California Edison is increasing its emissions-free generation mix and making huge investments in transportation electrification, including building 48,000 charging stations all over southern California through $750 million of investment from its ChargeReady 2 program. SCE is making investments both to provide clean electricity and enable their customers to make clean choices.

In addition to clean power generation and end use adoption, utilities are facing another serious climate challenge: the wildfire crisis. Fire investigators have determined that PG&E and SCE equipment have been responsible for major fires in California. The utilities are working to build, operate, and maintain their systems in a manner that reduces ignition sources and hardens the electrical grid, from insulating wires in high fire risk areas and cutting power on high wind days, but the uncertainty over their ability to absorb the financial impacts of the wildfire crisis remains a critical challenge.

“The scale and magnitude of the disasters that we’ve seen outstrip the ability of any particular industry to absorb. That’s something that the legislature has recognized, the insurance departments are recognizing, and the governor’s strike force recognized. How we allocate the climate-induced risks across industries and across our society has to adapt to the changing environment that we have. The insured losses from the 2018 wildfire season are in the order of $20-30 billion dollars,” said Chris Thompson, SCE.

The Catastrophic Wildfire Cost Allocation Commission is looking at this question and preparing a report. One possibility is the creation of a fund that could be capitalized from a variety of sources (utilities, insurance companies, taxpayers & others) in order to have a pool of funds available for recovery from those damages immediately and to allocate risks across society. Another response the governor is considering is moving to a fault based standard. Currently, the policy regime in the state is for liability without fault, which may not provide any inducement in getting utilities to improve standards.

“We need to make sure the insurance industry understands their role and responsibility, allow them the opportunity to recoup their costs, but also put some onerous on the utilities to do a much better job hardening their system, while understanding that we need to help them as well,” said Honorable Ricardo Lara.

“As far as the dynamic between the insurance industry and utility sector, a risk pool or a fund is a way to allocate that risk differently. We don’t want to bankrupt any industry due to climate induced change. We need to get to a system where we have a clear standard, we’re held to that standard, and if we fall short of that standard then we’re held accountable. You don’t want to squeeze the balloon and cause an economic problem elsewhere. We have to solve the problem, not shift it,” said Chris Thompson.

Housing

The state is suffering from a housing problem. Housing in many parts of the state is unaffordable and unattainable for too many of the population. Lack of options and affordability often result in people living a great distance away from their jobs or building in outlying areas. And where homes are being built makes a big difference for the climate – both in terms of greenhouse gas emissions from vehicle miles traveled (VMT) and wildfire/disaster sensitivity and risk.

One of the major challenges for California in meeting its climate goals is emissions from cars, which has increased by one to three percent each year for the past four years. The state has passed several measures to increase housing opportunities aligned with transit and transportation to reduce VMT, such as SB375 in 2008.

“We have got to give people options to get out of their cars or we are not going to meet our climate targets,” said Annie Notthoff.

Building in the wildland urban interface (where natural areas and development meet) introduces risk for wildfires and other disasters – both from the human risk that people can create and from the infrastructure that has to be built to serve those people.

“Everything has to have a planet component moving forward. Housing, transportation, every aspect of the work we’re doing. As we rebuild communities, what building materials can we update? How do we build in a much more resilient way? And that will cost money. Who bears the cost? Should we be building in certain parts of the state where we’re sensitive? And if local governments are going to allow for these homes to be built, should they be made to pay their fair share in terms of the amount of risk they are now incurring?” said Honorable Ricardo Lara.

Responsibility

Catastrophic climate events will ensure that climate change does not remain a partisan issue. As people are affected in rural and urban areas, in low- and high-income communities, in red and blue states, people will turn up demand for climate policies and solutions that protect their lives and communities. The responsibility lies with each of us and with policymakers to seriously address climate change.

“The goal of educating people is not for them to take personal responsibility for everything related to climate change because we solve climate change with policy changes not with changes in just individual habits. It’s policy that creates the conditions for people to make the changes that they need. So, ultimately, I would see it as educating people with the goal of having them be policy advocates so that they can make sure their representatives understand that they need to do something about the problem,” said Sean Hecht.

“There is no one solution. There’s no quick fix. The risk is huge and it’s increasing, and the responsibility rests with every one of us. We are going to have to look at everything we do as individuals and in the aggregate,” said Jerry Schubel, Aquarium of the Pacific.

Draft U.S. Forest Project Protocol Version 5.0 available for public comment – comments due July 12

To help facilitate a more complete and accurate understanding of how offsets are generated under the Forestry Project Protocol, the Climate Action Reserve has prepared an educational piece summarizing how the protocol works. Read “Key Accounting Principles for Improved Forest Management Projects within the Forest Protocol” and its accompanying infographic.

Teveia Barnes elected to Climate Action Reserve Board of Directors

Financial and public service leader brings long-standing experience, diverse perspective to the organization

LOS ANGELES, CA – Teveia Barnes, former Executive Director of the California Infrastructure and Economic Development Bank (IBank), has been elected to the Climate Action Reserve Board of Directors. After retiring from IBank, Ms. Barnes continues her volunteer work with Lawyers for One America, a nonprofit organization that promotes diversity in the legal profession and offers free legal advice and services to underserved communities in the San Francisco Bay area, and currently serves as Executive Director. Ms. Barnes also serves on the Advisory Council for Climate Impact Score, a program of the Climate Action Reserve that provides quantification assessments for an investment’s expected greenhouse gas emissions reductions.

“We are very excited and fortunate to have Teveia join our Board and contribute to the development and progress of the Climate Action Reserve. Teveia’s distinguished experience in climate finance, respected leadership in legal and public service, and dedication to promoting diversity and supporting underserved communities bring a unique perspective to the leadership of the Reserve,” said Linda Adams, Chair of the Climate Action Reserve Board of Directors.

Ms. Barnes’s career includes over 40 years of leadership at prestigious law firms, financial institutions, nonprofit organizations, and public service. As IBank’s Executive Director, Ms. Barnes strategically led the organization under its mission to finance infrastructure, economic expansion, clean energy, water and environmental and economic expansion projects. Prior to joining IBank, she was commissioner of the California Department of Financial Institutions, the chief state regulator of depository financial institutions. Ms. Barnes was a partner at the law firm of Foley and Lardner LLP and worked at the Bank of America NT&SA as associate general counsel and senior vice president.

“I am very pleased to be joining the Climate Action Reserve Board of Directors at such an important time for climate policy and climate finance,” said Ms. Barnes. “Climate finance is more than the sum of economic investments to meet GHG reduction goals; it is an opportunity for a more equitable future for diverse and disadvantaged communities, for shifting government priorities toward clean energy and environmental protections, and for transitioning our future infrastructure, ecosystems, and economies with a focus on improved health and air quality. I look forward to the new opportunities to encourage these goals as a Board Member of the Climate Action Reserve.”

Please visit the Climate Action Reserve website to learn more about the organization and its Board of Directors.

Under a USDA NRCS Conservation Innovation Grant, the Reserve with its project partners Environmental Defense Fund, K·Coe Isom, The Climate Trust, SCS Global Services and C-AGG embarked on an effort to expand adoption of grassland conservation by lowering the barriers to entry for landowners seeking to participate in greenhouse gas (GHG) emission markets. For more information, please check out our CIG report: Stimulating Grassland Conservation through Greenhouse Gas Emissions Markets

The updated U.S. Landfill Project Protocol Version 5.0 is now available for use

Urban Forest Management Project Protocol Version 1.1 now available

Nitric Acid Production Project Protocol Version 2.2 now available