Transcript Climate Goal - WRI seminar

Use of GHG Project Offsets
Reviewing Existing Programs
Jonathan Pershing
World Resources Institute
2nd Stakeholder Meeting of the Regional Greenhouse Gas Initiative
Boston, MA
Thursday, May 20, 2004
WRI
J. Pershing, RGGI, May 2004
Overview
• Rationale for/against offsets
• Alternatives to offsets
• Review of existing programs with
consideration of key issues
• Conclusions
WRI
J. Pershing, RGGI, May 2004
Rationale for using GHG offsets
Pro
• Reducing individual and system costs by extending
compliance options – adds compliance flexibility
• Brings in new/ uncovered sectors and facilities
• Allows industry outside of capped sectors to “test”
working of system
• Creates opportunities for innovation
• May make political agreement on cap easier – now
and in future
• Some sources that are difficult to quantify in cap-andtrade can be accurately measured in offset program
WRI
J. Pershing, RGGI, May 2004
Rationale for using GHG offsets
Con
• Adds administrative complexity and
costs
• Assuring quality/ environmental integrity
of offsets is difficult
• Reduces incentives for new entrants to
join trading system
WRI
J. Pershing, RGGI, May 2004
PRO: Cost reductions can be
significant with project offsets
regional marginal costs, US$ per ton of carbon
$300
$250
$200
Domestic action only
Annex I application
Universal application*
$150
$100
$50
*unlimited CDM
$0
US
Europe
Japan
Source: IEA Analysis of Kyoto compliance with US, no transactions costs
WRI
J. Pershing, RGGI, May 2004
CON: Undermines
environmental integrity
“…most of the projects would have been realised
even without CDM-finance, which implies that the
…support has no added value….It would
certainly be optimal to prove unambiguously that
non-feasible projects would turn into feasible, due
to CDM-finance. Unfortunately, this "financial
additionality" appears to be a very weak selection
criterion. Practice shows that such forecast
calculations could be adjusted in favour of any
desired outcome.”
-- VROM (Netherlands), review of NGO critique
WRI
J. Pershing, RGGI, May 2004
Alternatives to Offsets (1)
• Opt-ins
– Allows facilities not covered initially to become
covered (capped) and receive and trade
allowances
– Implies participation in emissions
monitoring/reporting/inventory requirements
– Determining stringency of opt-in caps challenging
– Used in acid rain program – but problematic here,
as only sources already reducing opted in
WRI
J. Pershing, RGGI, May 2004
Alternatives to Offsets (2)
• Set-asides (under a cap)
– Provide allowances to owners of non-covered facilities
– Allowances may be banked or traded
– Rules for set-asides have elements similar to those of
offsets:
• Project is not otherwise required or generate other
compliance/ permitting credits
• Project operates in the years it receives credits
• Project should reduces/displaces emissions
• Emissions reductions are measurable/verifiable
– Do not change overall emissions (come out of cap)
– Used in NOx Budget Trading Program
WRI
J. Pershing, RGGI, May 2004
GHG Offsets Programs
• International programs
– UNFCCC/Kyoto Protocol (JI, CDM)
– EU Emissions trading system (through its linking directive)
– World Bank – Carbon Finance (PCF and others)
• National programs
–
–
–
–
–
Dutch CERUPT/ERUPT Programs
Canada
Denmark
Japan
US Activities Implemented Jointly, State programs (e.g.,
Oregon Climate Trust)
• Private sector programs
– Chicago Climate Exchange (CCX) – project offsets
Non-GHG offsets programs (such as NOx, SO2 and others)
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nor CO2 adder programs are considered here
J. Pershing, RGGI, May 2004
Key Issues (1)
• Offsets location
– Issue: inside or outside of the region where cap applies?
– Conflict: reduced permit price vs. administrative costs, potential
loss in environmental integrity and sending revenues out of region
• Allowed Sectors
– Issue: which sectors, which gases
– Conflict: reduced permit price vs. lack of certainty in emissions
quantification (includes issues of double counting and indirect
emissions)
• LULUCF
– Issue: whether to allow forest/agriculture/soils offsets
– Conflict: reduced permit price and added industries vs. lack of
certainty in emissions quantification and permanence concerns
• Limits to allowable use
– Issue: Share of reductions to be allowed from offsets
– Conflict: reduced permit price vs. promoting local emissions
reductions
WRI
J. Pershing, RGGI, May 2004
Key Issues (2)
• Timing
– Issue: what are the start/end dates for project crediting
– Conflict: allowing more projects vs. additionality
• Verification
– Issue: How stringent/what procedures to be used
– Conflict: transactions costs vs. environmental integrity
• Special treatment for renewable energy
– Issue: Should offsets promote RE
– Conflict: least cost options vs. technology push incentives as well
as accuracy of offset calculation vs. simplicity and feasibility
• Baseline rules
– Issue: What rules for ensuring additionality
– Conflict: limiting project numbers vs. environmental integrity of
each project (limiting leakage, successful monitoring over time)
WRI
J. Pershing, RGGI, May 2004
Offsets locations
CDM
Outside UNFCCC Annex I (capped) Parties
JI
Within/ between UNFCCC Annex I (capped)
Parties
EU
Allows JI or CDM credits (i.e., both inside
and outside EU and accession countries)
PCF
Both developed (primarily EIT) and
developing countries
ERUPT/
CERUPT
ERUPT: Annex I (capped) countries
CERUPT: Developing countries (uncapped)
CCX
US, Canada, Mexico and Brazil only; others
may be added
WRI
J. Pershing, RGGI, May 2004
Allowed Sectors
CDM
Any sectors with agreed methodologies; “refrain” from
nuclear
JI
No limits set; “refrain” from nuclear
EU
No nuclear; hydro allowed but to be reviewed, sinks
restricted, double counting constraints could limit projects
(particularly energy efficiency and renewables) in EITs
PCF
Emphasis on renewable energy; limits on specific
technologies, sinks and countries in portfolio of projects
ERUPT/
CERUPT
ERUPT: Renewables, biomass, cogeneration, efficiency,
transport/distribution loss, fuel switching, waste
management, afforestation and reforestation
CERUPT: Renewables, efficiency, transportation, fuel
switching, waste management
CCX
Methane and forestry offsets (US, Canada, Mexico and
Brazil); fuel switching an renewable energy (US, Brazil);
changes as agreed by offsets committee
WRI
J. Pershing, RGGI, May 2004
LULUCF Treatment
CDM
Modalities under consideration, restricted to
reforestation and afforestation (no conservation)
JI
No restrictions established (but likely to apply CDM
rules)
EU
No LULUCF project banking; other modalities under
consideration (likely to apply CDM rules)
PCF
ERUPT/
CERUPT
Not LULUCF projects allowed
CCX
Forestry offsets (including reforestation, afforestation
and conservation) allowed in US and Brazil
ERUPT: Afforestation/reforestation projects only
CERUPT: No forestry projects allowed
WRI
J. Pershing, RGGI, May 2004
Limits to Allowable Share of Offsets
CDM
Up to 1% of base year emissions X 5
JI
Any activity to be “supplemental” to domestic action
although no limits yet set (track 2 may impose limits,
note that “green investment” constraints may apply in
some cases)
EU
Review at 6%, reconsider at 8%; must be
“supplemental”
PCF
Not applicable
ERUPT/
CERUPT
Only 50% of total reductions required to be achieved
through use of offsets (expected to be 1/3 through
projects in capped countries, 2/3 through projects in
uncapped countries)
CCX
Only 0.5% of the reductions in first year may be
satisfied with offsets; this increases each year (to 1%,
1.5%, and 2%); no more than 5% of the total 4-year
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reduction from offsets
J. Pershing, RGGI, May 2004
Timing
CDM
Credit for certified projects undertaken post-2000
JI
Projects begun post-2000; project credit from 2008
EU
Projects allowed for credit from 2008
PCF
Credit for any acceptable projects undertaken post2000
ERUPT/
CERUPT
AAUs to 2008, ERUs 2008-2012
CCX
Mitigation realized from 2003-2006 on forestry projects
begun from 1990, and on other projects from 1999;
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J. Pershing, RGGI, May 2004
Verification
CDM
Establishes operational entities and external 3rd party
certification and verification procedures; EB maintains
registry
JI
Not yet established; track 2 likely to be based on
CDM rules
EU
Through JI/CDM accreditation/verification processes
PCF
Initial verification that project built according to design
specs; follow-on verification of project operation
ERUPT/
CERUPT
3rd party registration/certification following CDM rules
CCX
Requires registration, independent 3rd party
verification
WRI
J. Pershing, RGGI, May 2004
Special Treatment for Renewable Energy
CDM
Special provisions (“fast-tracking”) for small scale RE
projects (>15 MW)
JI
None set
EU
No special dispensation
PCF
Fund focus is on renewable energy (60% of portfolio)
ERUPT/
CERUPT
No special provisions
CCX
No special provisions
WRI
J. Pershing, RGGI, May 2004
emissions
Baselines determine
crediting levels
baseline
potential
credits
• Baseline level and
crediting lifetime
determine maximum
number of credits
from a project
project emissions
time
WRI
J. Pershing, RGGI, May 2004
Brazil: possible implications of
standardised baselines in the
electricity sector
1000
tCO2/GWh
900
800
808
Fossil fuel only
700
675
North-Isolated region
426
Natural gas only
382
Natural Gas (BAT)
600
500
400
300
200
100
All sources
108
0
Wind
Natural gas (BAT)
Possible emission credits under different multi-project baseline options
WRI
J. Pershing, RGGI, May 2004
Baseline Procedures
CDM
Defined case-by-case basis: (a) Existing actual or historical emissions; (b)
economically attractive technology taking into account investment barriers; (c)
average emissions of similar project activities in the previous 5 years, with
performance in top 20% of category. Leakage addressed by inclusive project
boundaries. QA/QC monitoring procedure
JI
Two track approach: (1) determined by host country government; (2) under
auspices of supervisory committee that will develop operational rules (not yet
selected); latter likely to be based on CDM rules. Former choice only allowed if
host country satisfactorily complies with inventory and registry information
EU
Uses JI/CDM modalities, rejects projects that would lead to double counting
PCF
Project specific baselines using investment analysis (supply side) and control
group (demand side), uses standard World Bank data for country level baseline
information, use “filters” to reject projects otherwise legally required. For grid,
baseline plus power expansion over time, requires assessment against
plausible alternatives
ERUPT/
CERUPT
As with CDM, but also focus on financial and economic additionality as well as
barriers test. Uses standard emissions factors for electricity, all direct and
indirect sources more than 1% of baseline emissions
CCX
Forest and soil offsets quantified according to project size and on-site and
formulaic approaches; methane from control measurements, other additionality
rules still to be developed
WRI
J. Pershing, RGGI, May 2004
Offset Program Prices
Offset Price
Trading Price
N/A
~ €12/ton CO2*
PCF
~$3 – 4/ton CO2
N/A
ERUPT/
CERUPT
~$4 – 5/ton CO2
N/A
NA
~$1/ton CO2
EU
CCX
* EU price has declined in the past few weeks as national
allocations priced in market
Source: CO2e, Natsource, PCF, CCX
WRI
J. Pershing, RGGI, May 2004
Criteria for Program Evaluation
• Broad coverage, incentivizing lowest cost reductions
wherever they occur
– CDM is relatively high
• Assuring environmental integrity of cap (limiting “nonadditional” projects); requires methodology with high
confidence
– CDM is unclear (projects rejected by EB – and criticized by
NGOs; more projects recently passing screening)
• Reducing uncertainty for developers
– CDM is low (note numerous project proposal rejections)
• Minimizing transactions costs for developers
– CDM is low (estimates run to several hundred thousand $ )
• Minimizing oversight costs for program managers
– unknown
WRI
J. Pershing, RGGI, May 2004
Some very generic conclusions
• While the rationale for offsets has prevailed (in that
many systems are being explored), the difficulties in
operationalizing programs has meant relatively slow
starts
• However, level of industry interest has been quite high
(number of applications rapidly increasing and suggests
that offsets have mobilized innovation
• A review of the existing programs suggests that several
solutions have been found to minimize environmental
integrity loss; it is still too early to assess success in this
domain.
• Prices suggest that offsets are less expensive than
trades within and between capped parties.
WRI
J. Pershing, RGGI, May 2004
References
•
UNFCCC Clean Development Mechanism; COP-7 Report, part 2, p. 20-50
http://unfccc.int/resource/docs/cop7/13a02.pdf
•
UNFCCC Joint Implementation: COP-7 Report, part 2, p. 5-19: :
http://unfccc.int/resource/docs/cop7/13a02.pdf
•
EU Offsets Program: Greenhouse gas offsets: an introduction to core
elements of an offset rule; Discussion Paper C3 – 05; October 2002:
http://www.climatechangecentral.com/info_centre/discussion_papers/GHGoffsets.pdf
•
World Bank Prototype Carbon Fund:
http://carbonfinance.org/pcf/router.cfm?Page=DocLib&Dtype=4&ActionType=ListItems
#Les5
•
Dutch ERUPT Program: Dutch JI Program, Senter,
http://www.senter.nl/asp/page.asp?alias=erupt&id=i001003#ERUPT/CERUPT
•
Dutch CERUPT Program: Implementation of the Clean Development
Mechanism by The Netherlands, VROM,
http://www2.minvrom.nl/docs/internationaal/CDM%20Implementation%20document%2
029%20May%2003%20def_1.pdf and Dutch CDM Program, Senter
http://www.senter.nl/asp/page.asp?id=i001236&alias=erupt#
•
CCX Chicago Climate Exchange Rulebook:
http://www.chicagoclimateexchange.com/about/program.html
WRI
J. Pershing, RGGI, May 2004