With the announcement by ARB that the cap-and-trade program in California would double the number of offsets allowed for compliance, I thought it was time to take a look at what we’d be buying. There are some interesting surprises…
Offsets allowed into the California system will, at least at the outset, come exclusively from an organization called the Climate Action Reserve (CAR). CAR is an organization that both develops offset protocols, issues credits based upon those protocols, and operates a registry of issued credits. The California Air Resources Board has elected to use CAR protocols for compliance grade offsets rather than developing its own. So the question arises, what exactly is in the CAR portfolio?
It’s early days and so far, CAR has projects have issued offsets based on 7 different protocols totaling 8.25 million tons (see Figure 1). Only 4 of these protocols (landfills, livestock, conservation forestry, and US ozone depleting substances) will be eligible, at least at the outset, for use within California’s cap-and-trade program.
Figure 1: Total issuance of CRTs by project type as of November 1, 2010.
The portfolio, after a slow start, is growing quite rapidly, my estimate is that the current issuance rate is approximately 800,000 tons per month. The issuance rate will have to go up quite a bit in order to meet expected demand from the cap-and-trade, but issuance rates are increasing rapidly, particularly from landfills and ozone depleting substance protocols (see figure 2).
Figure 2: Cumulative Issuance of CRTs by month to November 1, 2010.
Perhaps the most interesting thing about the CAR portfolio is its origins – currently, CAR offsets originate in states. In fact, of the top 10 offset producing states so far, only 2, New York and California, have either operative or planned emissions trading scheme. As the California program spins up, these offsets are likely to increase in value substantially. Figure 3 shows the origin, by state, of the 8.25 million tons in the CAR portfolio. Arkansas is dominant because of a facility located in El Dorado, AR that can destroy ozone depleting substances. Together, AR, CA, NY, and TX account for just shy of 70% of issued offsets.
Figure 3: Origin by state of Issued CRTs as of November 1, 2010.
This last figure raises a question: could the development of a 50-state constituency accustomed to selling offsets into a compliance grade offset market change the politics of cap-and-trade? Remember that we don’t need a sea-change to move legislation – probably 10 votes switching sides might change the politics. The current volumes aren’t anywhere near large enough to generate that constituency, but volumes will likely grow dramatically, both as the financial incentives improve and as CAR develops new protocols that ARB allows into the cap-and-trade. Notable, CAR is currently beginning the process of developing three agricultural protocols that would have wide applicability for corn, grain, and rice producers. Perhaps the dollars and cents of offsets will, in a few years time, give a new reason to otherwise reluctant farm belt senators to think again about the merits of emissions trading. Only time will tell.