Transcript Document 7413519

The Value of Offsets in
Oregon’s Load-Based
Cap and Trade System
Carbon Allocation Task Force
Presented by: Michael Ashford
June 1, 2006
Agenda
• Background on The Climate Trust
• Rationale for Offsets
Policy
Economic
• Offsets are an Established Policy Option
• Importance of Offset Quality
• Offsets Support the Oregon GHG
Strategy’s Guiding Principles
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Background on
The Climate Trust
The Climate Trust Mission: Offsets
The Trust is a 501(c)(3) Non-Profit Corporation
“The Climate Trust promotes climate change
solutions by providing high quality greenhouse
gas offset projects and advancing sound offset
policy.”
3 Main Programs
• Oregon Power Plant Offset Program
• Greenhouse Gas Offset Partnership Program
• Offset Policy Initiative
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Who is The Climate Trust?
Independent Buyer of GHG Offsets
Market Leader
• One of the largest, most experienced offset buyers in
US and world markets
• Only state-recognized offset provider
 Portfolio: 11 projects, $4.5 million, 1.7 million metric
tons CO2
 Pipeline: Placing $7 million more now
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Who is The Climate Trust?
Promoting Sound Offset Policy
Offset Policy Resource
• Contributing directly to viability and integration of offset policy at
national, regional and state levels
 RGGI, California, Massachusetts, Washington
 USEPA, 1605(b), Senator Domenici & Bingaman Climate Change
White Paper
• Outreach and Communications
 UNFCC Conference of Parties, International Emissions Trading
Association, CarbonExpo, California Climate Action Registry, National
Association of Regulatory Utility Commissioners
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Economic and Policy
Rationale for Offsets
CO2 emissions
What is an Offset? (theory)
Specific Project That Reduces GHG Levels
The baseline case
Baseline emissions
Offsets
Project emissions
The project case /
monitoring &
verification
Project begins
Project ends
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years
What is an Offset? (practice)
Specific Project That Reduces GHG Levels
Truck Stop Electrification
•
I-5 Corridor in OR and WA
•
“Shutting-down-and-plugging-in”
shifts from diesel idling to lower
carbon grid electricity
90,000 metric tons CO2
Saving estimated 10 million gallons
of diesel fuel
•
•
•
Emissions co-benefits:
 1,400 tons of nitrogen oxides (NOx),
40 tons of particulate matter (PM)
•
16 year contract
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Policy Rationale for Offsets
More Money for Other Priorities
•
•
•
Effective in reducing GHG levels
Lower climate change mitigation cost to society
Funding driver
 into un-capped sectors
 into new & innovative technology
•
Economic co-benefits
 Create jobs; save money on energy; enhance energy security
by reducing oil imports; create demand for clean energy
products.
•
Environmental co-benefits
 Reduce air pollution; preserve biodiversity; improve habitat,
watersheds, and water quality; reduce soil erosion; protect
endangered species
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Economic Rationale for Offsets
Estimated Ranges for Mitigation Costs
Illustrative GHG mitigation prices
 US Offsets (Climate Trust)
 Kyoto CDM offsets
 Allowances in Europe
 Efficiency*
 Wind Green Tags ($10/mWh)
 Geo-Sequestration
*Cost to utility for mitigation in
conventional coal plant
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$4 - $7/ton
$9 - $12/ton
$~25+/ton
$15 - $40/ton
$~15/ton
More
Economic Rationale for Offsets
Power of the Market
• “Offsets specifically expand the scope of the program
and serve to unleash the power of the market to
stimulate innovation and cost-effectively reduce
emissions.”
 Pew Center on Global Climate Change*
• “Offsets help protect the market against price volatility
and … reduce the transaction costs of the emissions
trading market by increasing market liquidity.”
 The Nature Conservancy*
*Senators Domenici & Bingaman White
Paper
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Why are Offsets Important?
“Cap and Trade” Logic: The gains of trade
$10
$8
Will buy at $9 and save $1
Will sell at $9 and make $1
Marginal cost of GHG reduction for given “market”
Offset Innovation: Capturing Further Efficiencies
$10
$5
$8
Will buy at $5 and save $5
Will buy at $5 and save $3
Will sell at $5 and make $5
Marginal cost of GHG reduction with offsets
*Prices are for illustrative purposes only
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*
Offsets Fill a Crucial Need: Now
Critical to Transition to Lower Carbon Economy
• Bridge the Technology Gap
 Cheap Coal; IGCC; Geological sequestration
 Pew Center for Global Climate Change: “[I]t will take decades to
transition capital stock of power generating plants to low carbon
sources, so there is a critical need for offsets as a way of cutting
net emissions affordably in the short and medium term.”*
• “Fundamental Principle” of GHG Policy
 “… [All sectors should be required to contribute to the climate
solution, whether they participate as capped sectors or as offsets.
The rationale for this is that climate change is such a large problem
that all sectors should be asked to be part of the solution even
source that are designated as offsets.” – Center for Clean Air
Policy*
*Senators Domenici & Bingaman White
Paper
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Offsets are an Established Policy
Option
Where are Offsets Traded Now?
• Kyoto Protocol
Joint Implementation, Clean Development
Mechanism
• EU Emissions Trading Scheme
• New South Wales
• Voluntary Markets
PG&E, Ford, British Airways, Nike
Climate Trust, CCX
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Offsets in State Policy
•
•
•
•
Oregon CO2 Standard
Washington Standard
Massachusetts Standard
California
 “The focus [in Oregon and Washington] is to ensure
high-quality, cost-effective offsets that provide a
permanent and viable nexus between those
responsible for climate change emissions and the
currently available solutions to reduce and eliminate
those emissions over time. A program similar to the
Climate Trust program should be considered for
California.”
• Climate Change Action Team Report to the Governor (March
2006)
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Offsets in Regional Policy
• Regional Greenhouse Gas Initiative
 50% of required reductions can be offsets
• “[T]he RGGI offsets component is a flexibility
mechanism that provides a measure of insurance
against high allowance prices. By allowing a wider
range of technical options outside the electric power
sector to be used to achieve emissions reductions,
compliance costs will be lowered.”
 RGGI Staff Working Group Evaluation of Offsets
Supply and Potential Demand
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Offsets in Federal Policy
• Senator Domenici and Bingaman White Paper
 Extensive discussion of offsets
 Offset Pilot Program
• McCain-Lieberman Climate Stewardship Act
 15% of required reductions can be from offsets
• Senator Feinstein’s Strong Economy and
Climate Protection Act
 Substantial offset provisions, particularly in the
agricultural sector
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Importance of Offset Quality
Quality Projects: Selection Criteria
Rigorous Internal and External Review Process
• Primary selection factors
 Additionality
 Cost effectiveness: $/metric ton of GHG benefit
 Reliability of technology
 Reliability of project partner
• Other project selection factors include:
 Monitoring & verification
 Permanence
 Guarantees
 Location of project
- Replicability
- Expandability
- Portfolio diversity
- Co-benefits
Quality Projects: Additionality
Projects Must Create New Emissions Benefits
• Mitigation measures that would not occur without
offset project funding
 Excludes common practice, regulated activities
 Money making projects eligible, if other barriers
• Types of barriers offset funding overcomes
 Limited or no access to capital
 Investment hurdle rate
 No economic return
 High perceived risks
 Resource availability
 Infrastructure
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Quality Projects: Quantification
Experts Prepare Baseline Studies and M&V Plan
• Baseline study
 Build in expected changes from business as usual
• Monitoring & Verification Plan
 Measurement technique
 Periodic measurement
 3rd party verification
 Funding plan
• Escrow to ensure sufficient M&V funding
• Results used in contracts to verify delivery
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Ensuring Quality & Mitigating Risk
Top Priority for The Climate Trust
• Due diligence during project review
 Technology and its offset attributes
 Offset provider
• Portfolio diversity mitigates risk
• Structuring our contracts to mitigate risk
 Preserving our capital
 Reducing the risk of underperformance
 Defining the ownership of offsets
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Preserving Offset Fund Capital
Capital Preservation is a Fiduciary Responsibility
• Pay after the event creating the offsets
 Pay for verified tons as they occur
 Pay for program installation of measures
 Pay upon commercial operation (Engineer’s or 3rd
party certification)
 Conditions precedent to closing (Rely on senior
lenders)
 Security interest in project equipment
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Reducing Underperformance Risk
Ensuring We Get Tons After We Pay Our Money
• Most contracts include delivery guarantees
 Full or partial guarantee of quantity of tons
• Takes several forms
 Replace tons if a shortfall occurs
• On power generating projects where we pay upon commercial
operation, we require a guarantee of the anticipated quantity of tons
 Give money back
 Program offsets include performance milestones; Trust can deobligate
• Active role in managing our offset contracts
 Define remedies for underperformance based on regular
reporting
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Defining the Ownership of Offsets
Establishing Legal Basis for a New Commodity
• Extensive legal definitions regarding offsets
• Developer transfers any and all rights to CO2
reductions
 Bill of Sale
 Annual Offset Certificate
 Third party verification of the quantity of offsets delivered
• Programmatic offsets: Participation agreements
create a clear ownership trail to tons of CO2
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Avoiding Double Counting
Critical to Environmental Integrity
• Seller exclusions:
 Seller can’t sell the same tons to another entity
 Seller can’t use the tons for other purposes
 No sale of CO2 in environmental products
• E.g., Green Tags
• Disclosures and disclaimers:
 Written disclaimers from all partners & participants
 Disclose sale to regulatory authorities & others
 Define what “bragging rights” are OK
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Offsets Support
the Oregon GHG Strategy’s
Guiding Principles
Science-Based &
Effective Reductions
• Principle A: Oregon’s reduction goals and
solutions should be firmly grounded in science
and lead to effective GHG reductions
 Offsets yield real emissions reductions based on
rigorous monitoring and third party verification.
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Cost-Effectiveness
• Principle B: The Task Force shall begin with the
most cost-effective solutions first.
 Offsets direct funding towards the lowest-cost
mitigation source.
• Utilized only when they are more cost-effective than other
means.
 Flexibility afforded by offsets will help the load serving
entities meet their emissions reduction targets most
efficiently and most cost-effectively.
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Offsets Especially Relevant in a
‘Two-Player’ Market
• Oregon:
 Two capped entities with large carbon footprints
and several smaller entities with small footprints
 Placeholder: Price cap of $40/ton
• Without offsets:
 Trading more prone to gaming and likely to occur
close to the price cap
• With offsets:
 Offset price is another price point in the mix
 Capped entity has alternative, (lower) cost option
 Drive down overall cost of program
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‘Two-Player’ Market
Cap and Trade: No offsets
$30
$15
Will buy at $30 or less
Will sell at $16 or more
Transactions may move towards highest marginal cost
Cap and Trade ‘Plus’: Offsets offer alternative price
$30
$10
$15
Will buy at $30 or less
Will sell at $16 or more
Will sell $10 or more
Transactions more likely to move to lower marginal cost
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Economic Development & Innovation
• Principles C, E & G: High level of emphasis on
economic development and long-term economic
well-being of Oregon economy.
• Oregon can use the transition to clean energy as
an engine for economic development.
 Offsets encourage development by driving funding
to technologies that reduce GHG emissions.
 Utilize agricultural sector and rural assets
• Capitalize on Oregon’s unique leadership
 Climate Trust, Bonneville Environmental
Foundation, Energy Trust of Oregon
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Equity
• Principle J: Addresses equitable allocation of
costs and benefits when implementing the
Strategy.
 Offsets essentially transfer money from those causing
climate change to those feeling its effects and those
best equipped to immediately contribute to its
solution.
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Conclusion
• Offsets directly support the OR GHG Strategy’s
Guiding Principles
• OR should build on the millions of dollars
successfully invested (and being invested) in
offset projects
 Another “Oregon First” for the policy arena
• There is a strong independent rationale for
offsets
 policy & economic benefits
• Offsets are a widely recognized and accepted
 globally, nationally, regionally, and other states
• Offset quality is driving acquisitions
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Thank You
Michael Ashford
Deputy Director
The Climate Trust
(503) 238-1915
[email protected]
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