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Offsets - A Key Ingredient of Emissions Trading in California . . But!: 

Offsets - A Key Ingredient of Emissions Trading in California . . But! Laura Kosloff, Senior Counsel EcoSecurities Global Consulting Services CLE International – California Climate Change Law August 23-24, 2007

A Primer: 

A Primer EcoSecurities is a leading company in the business of sourcing, developing, and trading carbon credits in the global carbon market. Founded in 1997, EcoSecurities’ project portfolio today comprises of: Over 60 projects registered or submitted for registration with the CDM executive board Over 110 projects validated or submitted for validation Developed and/or contributed to more than 10 UN approved methodologies Over 160 of the projects have secured financing and over 110 are under construction or operational 400+ projects at different stage of the CDM cycle spanning 26 countries, using 17 technologies totaling >160 million CERs (1 CER = 1 ton CO2 equivalent)

Global Presence and Experience: 

Global Presence and Experience A local presence in over 20 countries, and CDM or JI projects in 36 countries Oxford New York Portland Los Angeles Mexico City Rio de Janeiro Santiago de Chile Dublin Paris* Madrid* The Hague Casablanca, Morocco Johannesburg Karachi, Pakistan Mumbai Bangkok Beijing Chengdu Philippines Seoul Kuala Lumpur Jakarta Guatemala Jordan

Emissions Trading a Very Useful Tool: 

Emissions Trading a Very Useful Tool In Case of Greenhouse Gases, Argument for Emissions Trading Particularly Strong Any given molecule of GHG can be anywhere within about 8 days Doesn’t precipitate out in local air shed Doesn’t pose (direct) health hazard It Can Cost-Effectively Advance Environmental Objectives A $2/ton reduction in China environmentally identical to $75/ton reduction at a U.S. power plant Factors That Have Often Constrained Emissions Trading in the Past Don’t Apply to GHG Trading for Climate Change Mitigation But Emissions Trading Can Be More Complicated Than It Looks

Cap and Trade Looks Simple, But . . .: 

Cap and Trade Looks Simple, But . . . For Cap and Trade to Work, Capped Entities Need to Face Very Different Emissions Reduction Costs And For Trading Prices to be Kept Down, Need to Access Low-Cost Reduction Opportunities In the Case of California, Capped Entities Generally Don’t Face Fundamentally Different Cost Curves for Emissions Reductions Meaning that trading could be very limited In the Case of California, Low-Cost Reduction Opportunities Are Really Quite Limited Meaning that prices could go very high This Means That GHG Offsets Will Almost Certainly be a KEY Part of Any Viable Trading System in California

What’s A GHG Offset?: 

What’s A GHG Offset? In the Context of an Emissions Trading System . . . An Emission Reduction That Happens Outside a Regulated Company’s Corporate Boundary, But Which Takes the Place of a Mandated Corporate Emissions Reduction Offsets Can be Generated in Almost Any Unregulated Sector or Country, and Can In Principle Come From Anywhere In the World However, for Offsets to Fulfill Their Purpose, They Have to be Reductions That Are “Additional” to What Would Have Otherwise Occurred For Offsets to be Additional, the Projects Generating the Offsets Should Result From (Be Incentivized by) the Existence of a Trading System and Offset Market

Sounds Good, But?: 

Sounds Good, But? Offsets Actually Quite Contentious In California, where emissions trading is viewed skeptically by key constituencies and offsets are characterized as an envtl justice issue In international markets, where critics are questioning the environmental integrity of offset systems In technology circles, where low-cost offsets can keep compliance costs so low that technologies aren’t fostered In environmental circles, where critics charge that offsets allow us to delay meaningful climate change action In branding circles, where offsets are sometimes equated with greenwashing

So Why Bother With Offsets?: 

So Why Bother With Offsets? Without Offsets, Meaningful Emissions Reduction Targets Likely to be Politically Non-Viable While Easy to Characterize as Win-Win, Emissions Reduction Mandates Do Cost Somebody Real Money Without Offsets, Costs of Achieving Significant Reductions Could Easily be $40-100/ton (4 to 10 cents per kwh of coal-fired electricity equivalent) With Offsets, Costs of Compliance Could be Reduced by 50%, Or More Will be Politically and Economically Necessary, Particularly in a Low-Emissions Context Like California, Even if This is Not Generally Understood Today But All Offsets Are Not Created Equal

Not All Offsets Are Created Equal: 

Not All Offsets Are Created Equal Additionality Ease of Baseline Establishment Quantifiability Ownership Easy of Monitoring and Verification Cost-Effectiveness Permanence

The Key Issue? Additionality: 

The Key Issue? Additionality Offsets Allow Emitters To Negate GHG Emissions In One Place By Procuring GHG “Credits” From Somewhere Else In A Capped System, Offsets Allow Emissions From Capped Sources To Increase With The Understanding That This Increase Is “Offset” By A Reduction At An Un-capped Source, Leaving Net Emissions Unchanged Therefore, The Reduction From The Uncapped Source Must Be A Response To The Offset Crediting Mechanism Otherwise Offsets Allow Global Emissions To Rise Beyond What Was Intended Under The Cap Credited Reductions Must Therefore Be Additional To Reductions That Would Have Occurred In The Absence Of The Trading System Exactly Same Logic Applies To Voluntary Offset Programs Why Is Additionality Such A Problem?

The Context for Additionality: 

The Context for Additionality If everything displaces coal If all efficiency gains count If all behaviors count If all nuclear counts If all forestry counts Theoretical Mitigation “Supply” Non-Additional Additional There are MANY things that can displace GHG emissions (they don’t all “offset” emissions, because many are happening anyway)

An Inevitable Outcome: 

An Inevitable Outcome If There’s No Additionality Policy Current Credit Demand Plenty of False Positive Credits to Supply Demand (at Basically Zero Cost) Additional Non-Additional

A Still Likely Outcome: 

A Still Likely Outcome With Inadequate Additionality Screening Current Credit Demand Still Enough False Positive Credits to Supply Demand Additional Additional Non-Additional

The Impact of Offset Rules: 

The Impact of Offset Rules Qualifying Reductions Note: The point here is that any set of offset rules, additionality and otherwise, creates a pool of eligible reductions. That simple fact doesn’t tell you the composition of the pool. It could be a poor quality pool or a high quality pool.

2010 GHG MAC Curve: 

2010 GHG MAC Curve © 2003 Cli Mit Supply Tool

What Goes In  What Comes Out: 

What Goes In  What Comes Out Environmental Integrity False positives False negatives Cost Sectors Quantifiability Secondary Benefits

Wouldn’t A Perfect World Be Great? : 

Wouldn’t A Perfect World Be Great? Forestry Methane Transportation Industrial Gases RE/EE Note: In a perfect world every potential offset would count (within the pool), and every potential offset would be “high quality” (green dots).

What Happens With Lax Rules? : 

What Happens With Lax Rules? RE/EE Forestry Methane Transportation Industrial Gases Note: In the real world not all offset are “high quality” (represented here by mix of red and green dots). With lax rules, a lot of lower quality offsets (red dots) make it into the eligible pool, potentially unacceptably contaminating the pool.

What Happens With Overly Tight Rules?: 

What Happens With Overly Tight Rules? RE/EE Forestry Methane Transportation Industrial Gases Note: With overly tight rules the eligible pool may be dominated by high quality reductions, but only a small fraction of potentially high quality offsets make it into the pool. This can significantly increase market-clearing prices.

What Can We Strive For? : 

What Can We Strive For? RE/EE Forestry Methane Transportation Industrial Gases Note: It’s not realistic to expect “perfect” rules and a perfectly high quality pool. But with careful attention to these issues, we can construct rules that limit the eligibility of low quality offsets, while keeping offset prices reasonable.

What’s One Approach? : 

What’s One Approach? RE/EE Forestry Methane Transportation Industrial Gases Note: One approach is to focus on those sectors where it’s relatively easy to identify high quality offsets, while excluding or down-playing market participation from sectors where quality is much harder to judge, or much more expensive.

One Solution: Manage Supply to Reflect Demand : 

One Solution: Manage Supply to Reflect Demand With Strict Additionality Policy Current Credit Demand Still Not Perfect, but Policy Objectives Advanced Additional Additional Additional

Morals of the Story: 

Morals of the Story Offsets Are Crucial to the Politics There Are Lots of Good Offsets (and Non-Offsets) There Are No Perfect Offset Criteria Key Decisions Are Policy Issues, Not Technical Issues What’s the acceptable balance? What’s the acceptable cost? What objectives (sectors/benefits) are we promoting? These Decisions Determine Integrity and Cost of Emissions Trading Unless We Make These Decisions, We’ll Argue About Offsets Forever There’s Real Work to be Done to Do This Right

For More Information: 

For More Information Contact: Laura H. Kosloff Senior Counsel EcoSecurities Global Consulting Services 503-231-2727 Laura.kosloff@ecosecurities.com

Additional Reading from EcoSecurities: 

Additional Reading from EcoSecurities Consideration of Climate Change in Facility Siting, in Climate Change Law. ABA. A Consumers Guide to Retail Carbon Offset Providers. Clean Air Cool Planet. Going “Carbon Neutral: The Retail Carbon Offset Market and How It Can Further Global Warming Mitigation Goals. Ecosystem Marketplace Going for the Green! Best Actions in Approaching Climate Change. Natural Gas & Electricity Journal. A Statistically Driven Approach to Offset-Based GHG Additionality Determinations: What Can We Learn?” American University Law Review. Fictional Credits or Progressive Action? Seattle Utility's Greenhouse Gas Offset Program Goes to Court. Environmental Law Reporter. Selling Carbon Neutrality. Environmental Forum. Of Crystal Balls and Market Fundamentals - Anticipating GHG Prices. Green Trading.