Climate Connect, 01 August 2013, London: Climate Connect interviews Kevin Townsend, Chief Commercial Officer, Blue Source about the compliance offset market in California and the possible impact of the implementation the Senate Bill 605 which restricts use of imported offsets.

Question: Which offset types are most preferred by covered entities for compliance purpose?

Answer: There are a number of factors that contribute to preference. Each company has its own way of judging offset projects and assessing risks.

Some entities prefer agriculture methane and ODS projects as the quantification is relatively simple which may lead to perceived lesser invalidation risk. At the same time, forestry projects bring large volume, and due to the large number of parties involved in the offset creation and verification process, chances of invalidation are reduced. Moreover, the regulations currently place invalidation on the landowner, rather than the holder of the credits, once the offsets are retired.  Also, forestry projects have a nice voluntary angle.

With regard to contractual structures, it depends on the risk appetite of the buyer. Several buyers are comfortable dealing with small firms and taking on the invalidation risk themselves, while others require investment-grade counterparties and balance sheets.

Of course, now you have insurance products in the market, which bring a new way to think about pricing and allocation of risk.

Question: How will the supply of early action offsets credits impact the prices and demand of CCAs?

Answer: The upcoming early action offset supply is probably already priced into current CCA values. People have been studying supply of offsets for a while now, and I don’t think the market is likely to see major surprises related to offset supply in the near term. Therefore, the Early Action Offset Projects currently listed are unlikely to put meaningful pressure on CCA and CCO prices; however, when the first ARBOCs are issued, this might improve offset prices slightly due to increased confidence.

Question: What other protocols are likely to be approved by ARB for compliance purposes, in future?

Answer: It seems that coal mine methane and rice cultivation related protocols are likely the next to be approved as the discussion around these is quite advanced at the regulatory level. After that there could be protocols related to agriculture operations and nutrient management (reduction of N2O in the field) that are approved – though this may still be a few years away.

Question: Many environmental organisations are opposing the use of REDD credits in California cap-and-trade program, what is your view on this?

Answer: I do believe REDD is a good thing when done the right way. REDD in California may not happen within the next few years due to the number of issues involved, but I hope these issues can be resolved and good projects can come to the market.

Question: What are the modifications that covered entities would like to see in the existing cap-and-trade regulation?

Answer: I would think that among compliance entities’ top interests would be cost containment, simplicity and clarity of regulations. There is room for improvement on some of these in the existing regulations.

Question: Is there anything you are keeping an eye on?

Answer: We are keeping a close eye on State Senate Bill 605 which, among other things, seems to prioritize offsets sourced from within California. It is doubtful that projects within California could generate significant volumes of offsets for the program, and this shortage would have the effect of raising compliance costs. It remains to be seen whether this bill gets passed and what changes, if any, it brings to the existing program.

Keywords: Kevin Townsend, Blue Source, California, Cap-and-Trade, Offsets

Author: Climate Connect Limited

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