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Implications of California Offset Limit Reduction | Scorcher

Published: July 25, 2017 by Editorial Team

Sean Penrith, The Climate Trust
Weekly Policy and Finance Update – July 24, 2017

Bottom line | AB 398 restricts the use of offsets as an upfront cost containment tool, instead relying on it as a worst-case resource triggered by an unnecessarily escalated price ceiling. Less greenhouse gases will be removed permanently from offset sectors, which is a shame.

There is much to celebrate with the passage of AB 398 that mustered a 2/3s vote with bipartisan support. The extension of the cap and trade program in California through 2030 was important for the state to meet its ambitious goal of reducing emissions to 40% below 1990 levels by 2030 and removed legal uncertainty that dogged the market. The bill was applauded nationally and internationally. Allowances prices rocketed up above the expected floor price levels for 2019. Our Canadian neighbors considering linkage to the California program saw the extension of cap and trade as “good news.”

An injury was suffered by the offset mechanism in the fray of extending the program. Environmental Justice pressure successfully saw the offset limit reduced from the current level of 8% to 4% beginning in 2021. This limit is raised to 6% in 2026. In all cases half the eligible offsets are to come from offset projects that offer direct benefits to the state of California.

Cost containment is always squarely in the sights of policy makers. Sadly, the true benefit of offset utilization in this regard has been compromised. AB 398 contemplates the release of allowances from the Allowance Price Containment Reserve (APCR) to act as speed bumps to curb the escalation of allowance prices. If this allowance reserve is spent and prices reach the price ceiling of around $60.00, offsets are described as a back up mechanism. There are two challenges with this. With the decreased offset usage limit and the in-state requirement, the offset market may see a number of market developer exits impacting many of the planned offset projects that span the 2021–2030 period. Thus, offsets may not be readily available should they be called on when allowances hit the ceiling.

Offset projects are years in the making and are simply not on/off faucets. In California Carbon’s Impact Analysis of AB398, the supply of in-state offsets would meet no more that 0.4% of the compliance demand over the 2021–2030 period. Secondly, that same analysis determined that reduced offset limits would significantly increase the program’s reliance on the price ceiling reserve, adding that the market “might expect to see a significant increase in the cost of compliance through 2030.” This added cost could be as high as $16 billion!

One cannot help but observe the irony that the bill restricts the use of offsets when they could most effectively be used to curb increasing allowance prices heading to the price ceiling. And yet, once the ceiling is reached, offsets are called upon as secondary defense. Offsets, by design, are the first and foremost cost containment tool rather than a worst-case resource relying on an escalated price ceiling to trigger its release.

EJ groups pushed hard to reduce the offset limit and to drive local projects in the state. On the face of it, the lowered offset limit rewarded their effort. As a result, less greenhouse gases will be removed permanently from the offset sectors. However, under AB 398, they have been asked to forfeit the ability of local air districts to enforce greenhouse gas emissions at local emitting facilities.

Our hope is that the demand from our Canadian partners, the anticipated passage of Oregon’s SB1070 in early 2018, the entry of Mexico into WCI, the upgrade to the RGGI program, and the implementation of the ICAO aviation mechanism shore up the offset market to ensure that real and permanent greenhouse reductions continue to occur in uncapped sectors.

Research and Resources

AB398 Impact Analysis Report
American Carbon Registry and, July 13, 2017

Top News Headlines

California Extends its Cap-and-Trade Program Through 2030
LegalPlanet, July 17, 2017

California Shows How States Can Lead on Climate Change
The New York Times, July 24, 2017

Nothing But Clear Skies Blog

Price Controls without Cost Controls
Sheldon Zakrreski, The Climate Trust, July 17, 2017

Latest In-State Offset Proposal Will Raise Legal Challenge
Nicholas van Aelstyn, Sheppard, Mullin, Richter & Hampton LLP, July 12, 2017

California: Outwards, Not Inwards
Sean Penrith, The Climate Trust, July 6, 2017

Image credit: Flickr/Bemep