Greenhouse Gas Offsets:Their Importance and Role in a

Load-Based Cap System

Presentation to California PUC Symposium

on Flexible Compliance Mechanisms

in a Market-Based GHG Cap SystemApril 20, 2007

Mike BurnettExecutive Director

mburnett@climatetrust.org

503-238-1915

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Today’s Topics

Overview of the Oregon CO2 Standard and The Climate Trust

Greenhouse Gas Offsets: How They Work and Why They are Important

Offsets in Oregon’s Carbon Allocation Task Force Design for a Load-Based Cap and Trade System

Transition to the Future: Project to Protocol

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Overview of the Oregon CO2 Standard

and The Climate Trust

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Overview of Oregon CO2 PolicyFirst Legislative CO2 Regulation in the US

Regulates CO2

New power plants must offset a significant portion (~17%) of their CO2 emissions

Unique Non-Profit RoleDeveloper can comply by paying a per-ton fee to The Climate Trust, which acquires CO2 offsets

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Who is The Climate Trust?Offset Market Pioneer and Quality Leader

Non-profit based in Portland, Oregon

One of largest offset buyers in USOnly state-recognized supplier of regulatory-grade offsets

Experienced offset practitioner: Since 1999Portfolio: 18 projects, $9 million, 3 million tons CO2

PipelineOregon Program: Placing $2.6 million into new projects this yearLarge Emitters: 10+ million ton acquisition, largest in US to date

Quality reputation with regulators, business, and environmental groups

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Oregon Power Plant Offset Program

Greenhouse Gas Offset Partnership ProgramLarge Emitter Customized OffsetsDonate-to-OffsetCarbonCounter.orgEmployee Offset Program

Offset Policy InitiativeAdvice to Oregon, Washington, RGGI, California …Assisting in voluntary market standards development

The Climate Trust: 3 Main ProgramsProviding Offsets and Advice

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Cornerstones of Our Offset PortfolioQuality Offsets are Trust’s Highest Priority

Diverse portfolio

High eligibility standards

Rigorous process and review

Strong carbon contracts

Competitive price compared to offset market

Quality Projects: Selection CriteriaRigorous Internal and External Review Process

Primary selection factorsAdditionality

Cost effectiveness: $/metric ton of GHG benefit

Reliability of technology

Reliability of project partner

Other project selection factors include:Monitoring & verification - Replicability

Permanence - Expandability

Guarantees - Portfolio diversity

Location of project - Co-benefits

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Solicitation StructureTwo-Phase Process

Phase 1: Short form proposalsProvides project summary informationLimited to 10 pagesBudget spreadsheet

CO2 benefit spreadsheet

Phase 2: Detailed proposalsSelected bidders will be invited to submit detailed proposals and respond to project specific questions from staff

Phase 3: Negotiation and ContractingClimate Trust enters into negotiation with selected bidders

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WindWind

Streamside Streamside ReforestatioReforestatio

nn

CogenerationCogeneration

Diverse, High Quality Offset PortfolioA Sampling of Our 18 Projects

Blended CementBlended Cement

Truck Stop Truck Stop Idle Idle

ReductionReduction

Rainforest Rainforest ReforestatioReforestatio

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Industrial EfficiencyIndustrial Efficiency

Energy Efficiency

Traffic Signal Traffic Signal OptimizationOptimization

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Greenhouse Gas Offsets:How They Work and

Why They are Important

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Policy Rationale for OffsetsImportant Tool for Countering Climate Change

Quality reductions: IF DONE RIGHT, equally effective in reducing atmospheric GHG levels as on-site mitigationLower cost: Offsets are only used if lower cost

Lowers climate change mitigation cost to societyMore money for everything else:

Food, shelter, health, security, recreation

Technology bridge: Allows reductions now while new low-carbon technology is developedCo-Benefits: Environmental and economic

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Where Do Offsets Fit? In the Mitigation “Pecking Order”

Offsets are an important but minority part of the climate solution

Balanced 4-step process:Cut wasteInvest in efficiencyBuy renewables for your electricityOffset the rest

Applies equally to companies and policy (and individuals)

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What is an Offset?Concept Originated in Accounting in 1769

Dictionaries tell us that a GHG offset…

1. Cancels out emissions

2. That are recorded in a GHG ledger

(or the atmosphere)

3. With an end effect as if the cancelled emissions had not occurred

A “compensating equivalent”

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What is a Greenhouse Gas Offset?A High Quality Environmental Commodity

A greenhouse gas offset is a specific project implemented to displace, avoid, or sequester greenhouse gases

The reduction is “abstracted” from the underlying project and sold by the offset project owner

The offset is used as a “compensating equivalent” for GHG emission reductions occurring at another source with an end effect as if the cancelled emissions had not occurred

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To

tal

GH

G E

mis

sio

ns

Facility Offset Project

Onsite Reduction

BE

FO

RE

AF

TE

R

BE

FO

RE

AF

TE

R

Offsite Reduction

Baseline

Reduction Target

The Basic Promise That an Offset MakesA “Compensating Equivalent” to Facility Reductions

$

$

The Basic Promise:

An emitter must invest in its own facility to implement facility reductions. As an alternative, when investing offsite (in offsets) for reductions, the project must similarly be dependent on offset funding.

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CO2 emissions

years

Baseline emissions

Project emissions

Project begins Project ends

Offsets

The baseline case

The project case

What is an Offset? (theory)Specific Project That Reduces GHG Levels

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Truck Stop Electrification

“Shut down and plug in”

Shifts from diesel idling to lower carbon grid electricity

I-5 Corridor in OR and WA

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

What is an Offset? (practice)Specific Project That Reduces GHG Levels

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Quality Offsets: AdditionalityOffsets are a High Quality Environmental Commodity

The “IF DONE RIGHT” caveat

“Additional”: Mitigation measures that would not occur without offset project funding

Excludes common practice, regulated activitiesOvercome barriers: Capital unavailable, investment hurdle rate, no economic return, high perceived risksMoney making projects eligible, if other barriers

Project must go beyond business-as-usual baseline (not base year)

“Environmentally additional” is a subset of “environmentally beneficial”

All GHG benefits are not suitable for offsets

20Facility

Offset Project

Legend

To

tal

GH

G E

mis

sio

ns

Before Reductions

After Internal Compliance

After Offset Compliance

Reductions Target

Facility Baseline

Non-Additional Offset

“Compliance”

Pre Compliance GHG Level

Post Compliance GHG Level

Why Additionality MattersEnsures Real Reductions (= “If Done Right”)

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Quality Offsets: Quantification Experts Prepare Baseline Studies and M&V Plan

Baseline studyBuild in expected changes from business as usual

Monitoring & Verification PlanMeasurement technique

Periodic measurement

3rd party verification

Results used in contracts to verify deliveryEnter in offset registry

Quality Offsets: OwnershipEstablishing Legal Basis for a New Commodity

Extensive legal definitions regarding offsetsDeveloper transfers any and all rights to CO2 reductions

Bill of SaleAnnual Offset CertificateThird party verification of the quantity of offsets delivered

Programmatic offsets: Participation agreements create a clear ownership trail to tons of CO2

Contracts: No Double CountingCritical 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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Environmental Integrity: ParamountEqually Important for Regulatory & Voluntary Markets

Purpose of offsets is not …Market transformation

Building a trading market

But rather tightly accounted tons reductionsEnvironmentally additional is a subset of environmentally beneficial

All GHG benefits are not suitable for offsets

Voluntary market integrity is crucial to the inclusion of offsets in policy mechanisms

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Offsets in Oregon’s Carbon Allocation Task Force

Design for a Load-Based Cap and Trade System

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Offsets: CATF Design15-Month Stakeholder Consensus Process

Full conceptual design of a load-based cap and trade system

Presented to Governor in January 2007

One of several climate bills that Legislature may consider this session

RPS, biofuels highest priority

Then omnibus climate bill, EPS, and finally cap and trade

May roll over into 2008 extended session

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Offsets: Important Minority RoleDrive Technology Change in Uncapped Sectors

State has been an offset leaderCO2 Standard: Positive experience

Continuing to lead on offset quality is important

Developing in-state offset capacity importantTechnology suppliers and intellectual capital

Adds “3rd leg” to LSE purchase optionsPurchase allowances from surplus LSE

Purchase at auction

Purchase offsets

Why minority role? Primarily want to drive LSE investments in low-carbon technology

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Offsets: Design ParametersBalancing Many Stakeholder Viewpoints

Minority component

25% of reductions from base year (not reductions from growing business as usual

Need for offsets should decline over time

LSEs need more flexibility early

Need functioning offset capability at beginning of cap system

Develop state and supplier capacity

Offset suppliers need certainty:

Project eligibility & accounting; Saleable

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Important Minority Role OffsetsLimited to 25% of Reductions from Base Year

Oregon GHG Emissions Under CATF ProposalShowing Role of Offsets and Unbundled RECs in Emissions Reductions

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Mil

lio

n T

on

s o

f C

O2

BAU

Unbundled RECs

Offsets

Cap

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Offsets: DefinitionsEvolution from Oregon CO2 Standard

In addition to surrendering state-issued allowances, an LSE could surrender a limited number of GHG offsets

Offsets are credits for reductions from outside the electrical sector or other regulated sectors.

Offsets allowed from 6 GHGs:CO2, methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and hydrofluorocarbons (HFCs)

Based on CO2–equivalent global warming potential

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Offsets: ProcessFrom Legislation to Rulemaking to Implementation

Legislation: Subsequent rulemaking to assure that all GHG offsets are real, quantifiable, verified, additional, permanent, and enforceable

ODOE rulemaking to determine eligibility Additionality, type, source, vintage, permanence

ODOE would establish protocols to quantify, verify and retire those offsets

Administrative fee to cover state’s costs of offset program

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Transition to the Future: Project to Protocol

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Project-to-ProtocolImportant Transition Phase in Offset Market

Historical offset market has been project-based

Shifting to standardized protocols

Currently, demand for offsets (and supply of desirable offset types) exceeds the “supply” of standardized protocols

Project-to-Protocol approach implements individual projects using rigorous criteria, and uses them as a basis for standardized protocols

Helps develop supply of quality of reductions while developing replicable protocols

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Thank You!

Mike BurnettExecutive Director

mburnett@climatetrust.org503-238-1915