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The Battle for Offsets: An economic case with Kevin Townsend of Blue Source, and Jeff Cohen of EOS Climate

January 9, 2017 by Harry Horner

ARB’s new Scoping Plan is rapidly taking shape – the proposed plan is due out this week, and the document will shape the next decade of the program. However, a debate over the future of offsets in California has sprung from the plan’s drafting process. Environmental Justice groups around the state have criticised offsets, proposing that the credits enable emitters to avoid making local site emission reductions – disproportionately affecting the health of disadvantaged communities. In particular, these groups point to last year’s successful bill AB197, which mandates ARB to prioritise direct emission reductions, and see offsets as falling foul of this new law.

Over the coming weeks, CaliforniaCarbon.info will provide a neutral platform for both sides of the debate to make their case. Through a series of interview’s and webinars, CC.info will explore the perspectives of stakeholders throughout the offsets industry and the Environmental Justice community. If 2016 was the year of ‘fake news’ and surreal mud-slinging in the public arena, CC.info endeavours to bring some rational and reasoned debate on a key climate issue to the start of the New Year!

This week we have invited Jeff Cohen of EOS Climate, and Kevin Townsend of Blue Source, to outlay the economic and market argument for the inclusion of offsets within the Californian Cap-and-Trade program.

 

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Jeff Cohen, Vice President, EOS Climate

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Kevin Townsend, COO, Blue Source

 

 

 

 

 

 

 

 

 

 

CaliforniaCarbon.info – Harry Horner: Could you briefly explain your role and where your company operates in the offsets industry?


Kevin Townsend: 
I am Kevin Townsend the Chief Commercial Officer for Blue Source. Blue Source has been an offset developer in North America for over 15 years, we participate in all of the major regulatory markets and the voluntary equivalents. As an offset developer, we develop the credits – mainly forest carbon in California, we manage the verification and registration process, and then sell them on behalf of the project owners.

Jeff Cohen: My name is Jeff Cohen, and I co-founded EOS Climate in 2008. We are an offset developer with an initial focus on Ozone Depleting Substances (ODS) projects, and have since expanded across multiple sectors. We created the ODS Destruction protocol that was ultimately accepted by California’s ARB, and we have been doing projects across the U.S. to recover and destroy CFC refrigerants from end-of-life refrigeration and air conditioning equipment. Those projects not only directly prevent emissions of very powerful greenhouse gases but also accelerate the transition to newer and more environmentally friendly technology.

 

HH: Before we delve more deeply into the ongoing lobbying battle, could you explain offsets, and why they represent real emission reductions?

KT: An offset is a reduction that comes from outside of the covered sectors, it represents an opportunity to think outside of the box, and for society to find the lowest cost of abatement possible, within some bounds. It is quite easy to understand from a protocol how a reduction is created: methane is destroyed, flared off or used to generate clean electricity, more carbon is stored in trees than would have been. There is a commitment for that land owner to store the carbon for 100 years, and forgo timber revenues to do that.

By digging into how offsets are created, it is clear to see how they represent real, permanent, verifiable and additional emission reductions. The ARB system has a ton of review steps to ensure that at least four independent bodies must find the above criteria fulfilled. On top of this the threat of invalidation still remains as a safeguard. In sum, these robust standards ensure real reductions.

Indeed, the requirements are so stringent that there are good emission reductions out there that have occurred but it is too costly to go through this process and convert them to credits. That is not to say I disagree with ARB’s current stance, quite rightly they should prefer to exclude good reductions, rather than include bad ones.

 

HH: Ontario joining the market in 2018 will expand the maximum demand for offsets by more than a third, do you have significant plans for project development north of the border?

JC: We have not pursued ODS projects in Canada because of questions regarding additionality.  Canada has had a refrigerant management program for about 15 years that funds destruction of CFC refrigerants.

 

HH: Why then do you think there is an advantage in using a market-based offset system to encourage these reductions, as opposed to the more specific and direct regulation that you have just highlighted for ODS in Canada?

JC: As a former regulator for the US EPA, the fact that there is a regulation on the books doesn’t necessarily mean things happen in accordance with those regs. In the case of CFC refrigerants, you have very powerful global warming gases, that are legal to continue to use in older equipment but are diffuse and extremely challenging to police at end-of- life.

The market-based incentive provides the mechanism for getting around these distribution and policing problems, it can overcome hurdles that inflexible direct regulation cannot so easily. That was one of the very motivations for me to start this company.

 

HH: When watching the ARB meeting over the past few months, the ‘offset coalition’ has been actively pushing for an increase in the offsets usage limit. Given the undersupply in the current market, is this campaign for an increase realistic from the supply-side?

KT: I think that the potential for additional offset volume is quite large, right now it is restricted by the number of protocols ARB has accepted, and the way those protocols are structured.  In terms of modifying the design of the existing protocols, geographic expansion, changes to calculation methodology.

I can use forestry as an example, the current version of the forestry protocol looks at baselines in quite a different way to the previous one. As a result, volumes are going to be a lot lower, however that was based on national timber stocking data from the US forest service, which is periodically updated. These revisions will ultimately affect the volume of credits from these projects.

JC: I am confident there is significant potential for additional offset volume to meet increased demand. Today, there are only 6 protocols in the California program, and output is dominated by just 2 or 3. There are a number of high quality offset methodologies that have gone through rigorous scientific and peer review via the carbon registries that should be considered for California and other jurisdictions. For example, there are new offset methodologies to promote reclamation and re-use of HFC refrigerants and deployment of non-HFC alternatives ahead of US EPA timelines which would complement ARB’s proposed  short-lived climate pollutant strategy.

 

HH: What would you say to those who would promote reducing the offset limit to try and tighten a significantly oversupplied market?

KT: I think that is quite a poor way to frame the argument, reducing the offset utilisation limit would have a tiny, tiny effect on the market. There are many other ways to address that issue. For example, changing allocation methodologies, raising the floor price schedule, or retiring unsold allowances early.

There is the argument that a stable and predictable carbon price gives a clearer decision set for entities to invest in emission reduction technology. The mandated net reductions will always occur due to the declining cap. So perhaps the root issue is viewing the carbon price hovering around the floor as a problem in itself.

 

HH: These changes to the regulation and the debate preceding them can lead to damaging uncertainty in the market? Is there not a case for holding off from change and letting the program mature?  

JC: Regulatory certainty is critical for investments in the kinds of low-carbon, advanced technologies and innovations that we all want. But there needs to be a process for review of the regulations and program implementation, and rapid refinement as we are able to learn deficiencies and identify improvements. Regular dialogue with the regulators is critical.

It is the major structural changes that we need to avoid more at this stage. Uncertainty over which path ARB will choose from its draft Scoping Plan is undoubtedly a debate that has hurt the market’s expansion, as investment is quelled or delayed. If any other path was chosen than cap-and-trade, the offsets industry as a whole would be totally upended, as would many other of these service sectors.

 KT: I would also add this, it is pretty early to be making substantial changes to California’s program, this was always designed for the long term. It was designed to guide a smooth adjustment to a low-carbon economy. I know some critics of the program say that progress is not coming quickly enough, but the original intent was to let the program roll-on so there are not disastrous economic consequences.

 

HH: In what ways do residents and consumers in California see economic benefit from the offset program?

JC: In terms of a direct effect on consumers, many of our ODS projects have involved destruction of CFC refrigerants recovered from old (pre-1995) refrigerators. In these projects, the owners of the old clunker fridges have been able to get rebates, often from their utilities, that help pay for a new, energy efficient fridge that saves them money over the long haul. This can be especially important for low-income households because refrigerators – especially the older models – account for a large fraction of our energy bills. In addition to household appliances, our projects also help finance installation of new, energy efficient large refrigeration and A/C systems which reduces power demand and indirectly power plant emissions.

In general, offsets provide cost-containment to utilities and other regulated entities. These savings are fed through to ratepayers and consumers across the board, perhaps the most significant benefit of finding lower-cost mitigation opportunities 

KT: I believe the entities see offsets as crucial, not only in their direct reduction in compliance costs for the individual company, but indirectly on their overall effect on the market price. ARB published an economic analysis a few years ago with allowance prices modelled at $21, it rose nearly 5x when offsets were not included in the program, some of that saving must be passed on to ratepayers and the like.

 

HH: How existential do you think the threat of offset limit reduction, or indeed prohibition, is from ARB?

KT: I think it’s real, in that there have been some attacks on offsets threat are really fundamentally untrue and inaccurate. I think it is our responsibility to ‘debunk’ a few of these myths – like questioning whether offsets equate to real reductions. I mean that argument does not hold water. ARB has the most rigorous verification process for this in the world. It’s just not true.

There are many co-benefits of offsets aside from the GHG reductions, I think it our job to educate on this. I think some of the people in decision-making positions are being fed misinformation on this.

 

HH: What do you think motivates the people feeding that misinformation?

KT: I think there are some very real health problems being experienced by disadvantaged communities, and I think those communities look to a point source of emissions, not GHG’s I would add, but often particulates, and become rather myopically focused on attempting to shut-down the whole facility.

I think they perceive, incorrectly, that market-based mechanisms result in even inclined increases in those pollutants, which I whole-heartedly do not agree with. I would also say that nothing I am saying is intended to undermine those problems, they are very real: local hazardous air pollution will lead to health issues.

Opponents of offsets will point to AB197 and how it requires this co-regulation approach where direct reductions in local pollutants and greenhouse gases have to be considered together, that is true, but not at the expense of one or the other. AB197 spells out three criteria that have to be considered: cost effectiveness, GHG reductions and local air pollutants. It is implied that they ought to be given equal treatment in policy.

 

HH: The opponents to offsets likely do not have problems with the offset activities themselves, such as the destruction of ozone depleting substances and forest conservation. The case is more levelled against how offsets loosen the cap-and-trade market, and may enable entities not to make as many on-site reductions? How would you reconcile that supposed problem?

KT: Opponents of cap-and-trade and offsets will cite that allowances and offsets are alternatives to direct emission reductions. But they’re not, it’s not a trade-off between one or the other.

Let’s look at the logic. There a few out-of-state facilities from power imports, but I think 88% of covered emissions are in state, whilst 92% of compliance must be met with allowances, so once the cap bites, local reductions must by definition follow.

Elsewhere, offsets provide that carrot for innovation, and that applies in other states. The fact that you have businesses and people in other states seeing value from good California stewardship means a lot for the State’s leadership role. That incentive fosters stakeholders in different states that in time will likely press for linkage or partnership.

JC: That’s a loaded question. The large emitters in California are buying permits for the ability to emit in-state. In the case of ODS projects, we are permanently removing chemicals with a global warming factor in the thousands compared to CO2.

So the offsets are direct in effect on the atmosphere, but not direct in locality. We are not giving entities more allowances to pollute –  the cap remains constant. Offsets offer a cost-effective alternative to bridge to an economy that is more able to make higher cost reductions, with less economic collateral.

 

HH: If offsets do form that ‘bridge to a green economy’, is it not right that over time that bridge is reduced as we get closer to that destination. Do opponents of offsets thus have a point in asking for a step-down approach to offset limits?

JC: The cap needs to be tightened too, and you have two counterbalancing trends in that respect. The tighter the cap presses entities, the greater demand for cost-containment mechanisms such as offsets. Costs musts be contained within bounds for practical and political reasons, and offsets provide regulators with a tool to manage that system. That perhaps more than anything is why offsets form such a key part of the overall program’s structure.

The decision over adjusting offset limits should be based on thorough economic modelling and analyses by ARB with public input. It is vital that the debate is informed by facts and quantitative evidence, rather than any strain of misinformation.

 

HH: Indeed, it’s no longer 2016 – the very ‘year of misinformation’!

Harry Horner – (harry@californiacarbon.info)

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