CaliforniaCarbon.info, November 21, 2016

Harry Horner – (harry@californiacarbon.info)

Key takeaways from November Board meeting: 

• 7.9% offset usage in most recent compliance event.
• January Scoping Plan Draft will still include all 3 scenario alternatives, market will have to wait till Spring for confirmation of Cap-and-Trade.
• Offset limits post-2020 have become the key regulatory and lobbying battleground.
• REDD+ sector-based offsets will not be included in this amendment cycle.
• Ontario linkage progressing as planned for 2018 linkage.

Offset usage in 2015

Perhaps the most significant revelation from ARB’s Board meeting last Thursday was the least emphasized. In the recent compliance event for 30% of 2015’s emissions, 7.9% of all instruments surrendered were offsets – just 0.1% short of the full permitted usage.

Given offset usage for the first compliance period was down at 4.4%, this increased uptake represents a sea-change in California and was well above market expectations. It demonstrates how the newly included sectors of transport fuels and CO₂ generation have used offsets to their full potential, and how increasing numbers of entities are acting as rational cost-minimising agents in their compliance. Market forces are truly beginning to take hold.

At the 7.9% rate, slightly more than 8 million of the current stock of ~31.5 million will have been surrendered and retired in 2016. The remaining ~23.5 million is well short of the ~72.8 million required if (near) full offset usage were to continue in California, through all remaining obligations in the second compliance period. The question is as to whether the developers, verifiers and ultimately ARB can make up this shortfall in the next two years. If not the status quo will remain, allowances will remain in heavy surplus (albeit it slightly less so) and offsets in significant shortage.

Scoping Plan alternatives remain open till Spring

As discussed in last week’s Regulatory Round-up, ARB has temporarily placed a crossroads in front of the post-2020 Californian program. It is evaluating between continuing with Cap-and-Trade, switching to a Carbon Tax, or replacing it with Direct Regulations. Stakeholders were hoping the path would be selected as early as January’s Draft Scoping Plan document; thus clearing up this fundamental, if remote, uncertainty hanging over Cap-and-Trade in California.

However, it can be inferred from staff comments at the meeting that, at earliest, the chosen path will be announced March 2017, though more likely we will find out later in Spring. Of slight relief was the strong implicit staff preference for Cap-and-Trade over a Carbon Tax or Direct Regulation. The comprehensive stated list of benefits of carbon trading was only slightly longer than the list of given drawbacks for the two alternatives. In sum, we can be confident, but not fully certain, of Cap-and-Trade post-2020.

First shots fired in earnest in battle over offset limits 

Even though Cap-and-Trade has not formally been accepted post-2020, heavy lobbying has already begun on what it may look like if so. The offsets community, both on the supply and demand-side, rallied around this part of the program after its future was explicitly threatened in the workshop last month. The slick, coordinated, and multi-faceted assault of floor comments admittedly made an impressive case for increasing, or at least maintaining, the current 8% offset usage limit.

This was in stark contrast to the return fire, or lack thereof, from the other side of the debate. Due to the misfortune of illness and calendar clashes, no member of the Environmental Justice Advisory Committee (EJAC – see here for details) was able to attend and provide the case against offsets. One member of an auxiliary Environmental Justice group did air general points on the subject. CC.info is looking publish a response directly from EJAC in the near future.

The ‘pro-offsets coalition’ released a strategised series of arguments which crucially included comments from groups that would fall under EJAC’s remit, somewhat cutting the legs out underneath their opposition. These included economically disadvantaged communities, as well as tribal groups both in and out-of-State.

The issue of environmental co-benefits was discussed head-on, and alternative narratives were offered. Perhaps most crucially, the offset coalition actually lobbied for an increase in offset limits, doubling it to 16% was aired; this is an intriguing tactic by the group, as it allows ARB to broker a ‘compromise’ on the current 8%. Shooting for the stars and landing on the moon – it makes for a good first move in negotiation.

The outcome of this public debate will be influenced by the sheer contrast in lobbying firepower between the professional resources summoned on one side, and the unpaid and heavily-burdened committee on the other. If this imbalance continues, it is more likely the pro-offsets alliance will emerge victorious.

Other material updates – sector based offsets and Ontario linkage

It was confirmed by staff that REDD+ sector-based offsets would not be included within this cycle of rule-making, although it was stated that they were firmly on ARB’s future agenda. In sum, it will be well into the third compliance period before the market has a chance of seeing this offset type available for purchase and compliance.

Secondly, the proposed linkage with Ontario was confirmed again for January 1, 2018, note that the board requires the Governor’s approval of linkage partner before it can proceed. The accompanying amendments are due for a second hearing in the Spring of 2017, and then are scheduled to become effective later in October.

Harry Horner – (harry@californiacarbon.info)