cap-and-trade program – Page 3

Implementation of California’s Cap & Trade Program Faces Potential Delay after Court Ruling

In a decision issued on March 18, 2011, a California Superior Court judge threw up a roadblock to the implementation of California’s cap-and-trade program by suspending the implementation of A.B. 32, the state’s landmark climate change law on the grounds that the California Air Resources Board (CARB) failed to properly consider alternatives to a cap-and-trade system. While the Court upheld the validity of CARB’s Scoping Plan for implementing A.B. 32, thus saving CARB from having to revise the Scoping Plan, it found flaws with CARB’s environmental review of the Scoping Plan under the California Environmental Quality Act. As a result, not only has the proposed cap-and-trade program been put on hold, but at risk are other elements of the Scoping Plan, including the state’s low-carbon fuel standard and a 33% renewable portfolio standard for electricity by 2020. In his ruling, Judge Ernest Goldsmith of San Francisco Superior Court said that the CARB “seeks to create a fait accompli by premature establishment of a cap-and-trade program before alternatives can be exposed to public comment and properly evaluated.”

The ruling by Judge Goldsmith does not prohibit the CARB from adopting cap-and-trade or require the delay of the scheduled start of date of January 1, 2012, but Judge Goldsmith said that CARB must first analyze other options (such as a carbon tax) and explain why it did not choose such options. Given the tight timeline this year for finalizing the details of California’s climate change plan, the ruling represents a potentially significant hurdle in the timely implementation of the state’s greenhouse gas emission reduction initiatives. The CARB’s spokesperson, Stanley Young, expressed dismay at the scope of the ruling, which requires the board to conduct an environmental review and invite public comment before taking further steps to implement the law. Mr. Young has indicated that the CARB will appeal the decision, which could result in pushing back the cap-and-trade program’s January 1, 2012 start date. An alternative is for the CARB to seek a stay on the ruling that will allow it to implement the climate policies as planned until a final verdict is issued. Also, the CARB could complete the necessary analyses as quickly as possible, but the results of this approach would be uncertain. For example, if the CARB is unable to satisfy the court’s concerns by October 2011 – which is the key deadline for adopting cap-and-trade regulations – this would most likely put the January 1, 2012 start date at risk. If California’s cap-and-trade program is delayed, it is likely that other WCI jurisdictions such as B.C., Ontario and Québec, will also delay the implementation of their cap-and-trade programs until such time as California begins trading.

A.B. 32 was passed in 2006 and requires the state to reduce greenhouse gas emissions to 1990 levels by 2020. The legal challenge to California’s cap-and-trade program was brought by environmental justice groups (the Association of Irritated Residents and other groups) that consider the plan too weak. In particular, they argued that the cap-and-trade program would result in increased pollutants in poor and non-white communities. More mainstream environmental groups, however, have supported cap-and-trade and stayed out of the legal action.

The next likely step is that a Writ of Mandate will be filed within 10 days of the March 18 decision. The Writ is the plaintiffs’ interpretation of the decision and will include their preferred remedies. The judge will then decide on the final remedy. Any appeal to that decision would have to be filed within 60 days from the date the decision was entered.

At this stage, it is unclear what the court-ordered remedy will consist of and whether it will affect all work on measures to reduce greenhouse gas pollution – observers indicate that it most likely it will not. Following the decision, the Environmental Defense Fund issued a conciliatory statement that perhaps best captures the intent of the parties: “It is clear from examining arguments of both parties before the Court that CARB and the environmental justice groups bringing the action against the State are committed to improving California’s environment and fighting climate change and do not intend to bring AB 32 work to a halt.” Stay tuned as this story evolves.

California Adopts Cap & Trade Program after Landmark Vote

In a landmark 9-1 vote on December 16, 2010, California’s Air Resource Board (ARB) voted to adopt the first large-scale cap-and-trade program in the U.S.

In a landmark 9-1 vote on December 16, 2010, California’s Air Resource Board (ARB) voted to adopt the first large-scale cap-and-trade program in the U.S. This vote represents the culmination of an eventful year for California’s AB 32 legislation, which aims to reduce the state’s greenhouse house gas emissions to 1990 levels by 2020. In California’s general elections held in November 2010, AB 32 survived a ballot measure that would have indefinitely delayed the program. California’s progress towards cap-and-trade comes as federal efforts to establish a nation-wide emissions trading program have stalled in Congress.

Under the proposed California cap-and-trade rules, the state would initially give away allowances to regulated industries. In later years, California would auction allowances. Industries that could show the regulations were putting them at a significant competitive disadvantage to companies in other, less carbon-constrained, jurisdictions could qualify for additional free allowances. The proposed rules would establish a $10 per metric ton auction floor price on carbon. Regulated emitters would be able to purchase carbon offsets, which are expected to trade at a discount to emission allowances, to comply with 8% of their annual emission obligations.

Offsets under the California Program

In addition to the regulations for the cap-and-trade program, ARB adopted four protocols that will be used to generate offsets for compliance, marking the first time forest carbon offsets will be included as a part of a compliance carbon market.

Offsets will come from early action efforts, compliance offsets and a category known as sector-based offsets, which will come from programs managed in developing countries. Early action offsets include those from the 2005-2014 vintages of Climate Action Reserve (CAR) credits from projects in methane digestion, destruction of ozone depleting substances, forestry and urban forestry.

In anticipation of California’s cap-and-trade program, the carbon market has responded with a jump in offset prices. Analysts note that offset prices have doubled from about $4 per ton of to $8 per ton amid higher volumes of trading in recent weeks.

Analysts have also predicted a shortfall in the supply of offsets. CAR projects that the ARB-approved protocol types will be able to generate approximately 30 million tons of credits through 2014, which credits can be used in the California program. However offset demand is projected to exceed 200 million tons through 2020. Now that there is regulatory certainty, the market must now work to fill the gap between offset supply and demand.

New Mexico Approves its Cap-and-Trade Program

In other news, New Mexico narrowly approved its cap-and-trade program in early November 2010 as well as the state’s participation in the regional Western Climate Initiative market. These measures will not go into effect unless other U.S. states or Canadian provinces move ahead with similar systems for capping emissions. The New Mexico program would regulate approximately 63 large industrial sources.

Creating or Buying Credits – Financing Your Next Cool Move!

Offset credits are created through the implementation of projects that result in emission reductions or removals beyond what would have been done under normal business activities (the so-called “business as usual” baseline). One credit represents the reduction or avoidance of emissions of one tonne of carbon dioxide equivalent (CO2e). Once offset credits are created and certified by accredited third parties, they can be sold to buyers in the market (usually regulated entities that need to meet certain compliance obligations). The system described above is often referred to as a “compliance market”. Offset credits can also be sold in the voluntary market to non-regulated entities who are looking to reduce their carbon footprint voluntarily.
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Climate Change mitigation strategies aimed at reducing greenhouse gas (GHG) emissions can take any number of different forms. The most drastic one would be to simply make the emission of GHGs illegal. This is an extreme example, one that would not be a viable option in an economy based on industrial growth. A more viable options that have been implemented by some, and considered by others, to bring about GHG reductions are market mechanisms. Market mechanisms are designed to utilize market forces to change behaviour, thus leading to reductions in emissions.

Driving Behavioural Change

The most important aspect of market mechanisms is to drive behavioural change – whether by individuals, governments, companies or others – in the direction of low carbon or less emissions-intensive technologies and processes. Offset credits are one of the instruments that have been employed in the carbon market to reduce emissions. However, the market mechanisms that have emerged so far vary quite a bit in their mechanics. As a result, the offset credits generated in these markets will vary accordingly.

How does a carbon market work?

In a so called carbon market (this usually encompasses all greenhouse gases); regulated entities can buy or sell allowances or permits for emissions, or credits for reductions in emissions of specified pollutants. Carbon trading can be done at a regional, national or international level. Under a typical carbon trading regime, regulated emitters will be allocated a limited number of emissions. Emission allowances may be created by a regulating entity, through emissions reduction activities or both. These emission allowances can be auctioned or given away for free. Once initially allocated or created, emission allowances are fully fungible commodities, meaning they can be bought, sold, traded or banked for future use. Often, carbon markets will also allow the use of offset credits as a compliance tool. Allowances effectively set a price on GHG emissions while credits set a cost reward for the investment made to reduce or avoid GHG emissions.

Creating Offset Credits

Opportunities in the Carbon Market

You can purchase credits to offset unavoidable GHG emissions to either meet your own carbon neutral targets or to comply with regulatory emission requirements. You have to make sure the credits you buy are appropriate for the purpose you want to use them for. GHG Accounting can help you make the right decision and evaluate this in the most cost-effective way.

You can also create offset credits. Offset credits can help generate revenue that you can put towards your next efficiency investment. Do you have to replace old machinery, installations or boilers? Or are you changing the way you deal with waste products, energy and emissions? Even if you have done so recently, your actions may still qualify as an emissions reduction project and can earn you real cash!

What GHG Accounting Can Do For You

The effective accounting and management of greenhouse gas (GHG) emissions requires unambiguous, verifiable specifications. This will ensure that a tonne of carbon equivalent can be consistently calculated. To that end, an internationally agreed upon standard for measuring, reporting and verifying GHG emissions was introduced in 2006 by the International Organization for Standardization (ISO) and is referred to as ISO 14064. GHG Accounting Services Ltd. provides specialized GHG consulting and accounting services, including (i) emissions reporting and footprint inventory quantification, (ii) emissions reduction project planning, and (iii) quantification, documentation and carbon offset credit registration.

Manitoba begins Consultation on Proposed GHG Legislation

The Manitoba government has launched a public consultation period to gather input on proposed cap-and-trade laws aimed at reducing greenhouse gas (GHG) emissions. The consultation is part of Manitoba’s commitment, announced in December 2009, to move forward on enabling legislation to create a cap-and-trade system.

In June 2007, Manitoba joined the Western Climate Initiative (WCI). It is expected that Manitoba’s system would integrate with the WCI, meaning that Manitoba will be able to participate in the WCI trading system with BC, Ontario, Québec, California as well as other several U.S. states. The WCI’s goal is to reduce GHG emissions in the region by 15% below 2005 levels by 2020.

In 2008, Manitboa’s GHG emissions was 21.9 megatonnes of carbon dioxide equivalent (CO2e) or approximately 3% of Canada’s total GHG emissions. Manitoba’s GHG emissions profile is unique among Canadian jurisdictions. Unlike other Canadian provinces whose GHG emissions come from a small number of large emitters, the majority of Manitoba’s GHG emissions come from many smaller emitters across a wide range of sectors.

Manitoba’s proposed cap-and-trade program would affect approximately 18 emitters that release more than 25,000 kilotonnes each of GHGs per year. Another group of about 36 emitters that each release 10,000 kilotonnes of CO2e per year or more (but less than 25,000 kiltonnes) would only be required to report their emissions.

According to data from Environment Canada, in 2008 the Koch Fertilizer plant in Brandon was the largest emitter in Manitoba, followed by Manitoba Hydro, Winnipeg’s Brady Road Landfill, TransCanada Pipelines and HudBay Minerals.

Comments on the proposed cap-and-trade program can be made online through the Manitoba Conservation Department website until March 15, 2011.

WCI Proposes Harmonised Reporting Requirements for Canadian WCI Members

On September 8, 2010, the Western Climate Initiative (WCI) released its proposal for revising and harmonising the existing Final Essential Requirements for Mandatory Reporting (the Essential Requirements) for use in Canadian jurisdictions. The proposal is entitled Harmonisation of Essential Requirements for Mandatory Reporting in Canadian Jurisdictions with the WCI Essential Requirements for Mandatory Reporting and the EPA Greenhouse Gas Reporting Program (the Harmonisation Document).

By way of background, on July 16, 2009, the WCI published the Essential Requirements for implementation by WCI Partner jurisdictions. On September 22, 2009, the U.S. Environmental Protection Agency (EPA) adopted its final Mandatory Reporting Rule (the EPA Rule) for greenhouse gas emissions. On May 28, 2010, the WCI invited stakeholder comment on its proposal to harmonise the Essential Requirements with the EPA Rule for use in a cap-and-trade program. In order to maintain consistency across all WCI jurisdictions, WCI members acknowledged that the WCI proposal to harmonise with the EPA Rule necessitated the development of revised Essential Requirements for use in Canadian provinces to ensure harmonised quantification methods throughout the U.S. and Canadian WCI jurisdictions. As a result, WCI members directed the WCI Reporting Committee to develop amended Canadian Essential Requirements that are themselves harmonised with the proposed WCI Essential Requirements for use in U.S. jurisdictions.

The following principles were applied in the harmonisation process:

1. A Canadian facility should apply the same functions, equations, sampling protocols and measurement criteria as U.S. facilities subject to the U.S. version of the harmonised Essential Requirements. This means that the harmonised Essential Requirements will achieve the same level of reporting accuracy for Canadian and U.S. facilities, but the U.S. version may require more data elements to be reported to harmonize with the EPA Rule.

2. The quantification methods included in the harmonised Essential Requirements must remain sufficiently reliable and accurate to be employed in a greenhouse gas (GHG) cap-and-trade program.

3.The WCI reporting system must remain suitable for use in Canadian jurisdictions. For example, it must allow reporting in metric as well as English units and must, where necessary, include Canada-specific emission factors.

4. The harmonised Essential Requirements should facilitate harmonisation with Canadian federal reporting. Some Canadian jurisdictions are working with Environment Canada to develop a one-window reporting tool for provincial and national GHG reporting requirements.

The WCI anticipates that Canadian WCI members will implement the harmonised Essential Requirements by adopting them into or through their reporting regulations. The WCI is also working on minor revisions to the general provisions of the Essential Requirements and the development of quantification methods for upstream oil and gas, natural gas transmission, distribution and storage, underground coal mine and magnesium production that are appropriate for use in Canadian member jurisdictions.

A stakeholder call to discuss the proposal will be hosted by the WCI during the week of September 20th. The Harmonisation Document is available through the WCI web site.

Canadian Provinces Forge Ahead on Cap-and-Trade System

Canada’s three largest provinces – Québec, Ontario and BC – are moving forward with a cap-and-trade system designed under the Western Climate Initiative (WCI) to reduce greenhouse gas (GHG) emissions. This decision comes after plans for a cap-and-trade system have been abandoned by the U.S. Senate.

The cap-and-trade system, scheduled to begin trading in January 2012, would cap emissions on large industrial facilities in Ontario, Québec and BC, as well as in California and New Mexico. The five jurisdictions forging ahead are part of the WCI (other group members, such as Utah and Arizona, have not committed to the system). On Tuesday July 27, 2010, the WCI released its comprehensive design strategy (for more information on the design document, please see our overview: link

The WCI’s commitment is to reduce industrial GHG emissions at the regional level from 15% below 2005 levels by 2020.

Each jurisdiction continues to weigh the pros and cons of moving ahead with the WCI system. In BC, any industrial operation emitting more than 25,000 tonnes of greenhouse gas per year will be subject to the system. This threshold will capture 40 operations in the province. While the regulatory framework for a cap-and-trade program has been put in place (under the Greenhouse Gas Reduction (Cap and Trade) Act and its associated Reporting Regulation), the details of the program as they will apply in BC have not yet been settled.

WCI Releases Comprehensive Strategy to Address Climate Change and Stimulate Clean Energy Economy

On July 27, 2010, the partner jurisdictions of the Western Climate Initiative (WCI) released a comprehensive strategy designed to reduce greenhouse gas (GHG) emissions, stimulate development of clean energy technologies, create green jobs, increase energy security and protect public health.

The Design for the WCI Regional Program (the Design Document) is the product of two years of work by seven U.S. states and four Canadian provinces (including Québec, Ontario, Manitoba and BC). The objective of the WCI is to reduce regional GHG emissions to 15% below 2005 levels by 2020. This regional goal will be achieved by:

• creating a market-based system that caps GHG emissions and uses tradable permits to incent the development of renewable and lower-polluting energy sources;

• encouraging GHG emission reductions in industries not covered by the emissions cap, thus reducing energy costs region-wide; and

• advancing policies that expand energy efficiency programs, reduce vehicle emissions, encourage energy innovation in high-emitting industries, and help individuals transition to new jobs in the clean-energy economy.

A recently updated economic analysis by the WCI indicates that this plan can achieve the regional GHG emissions reduction goal and realize a cost savings of approximately US$100 billion by 2020.

Overview of the Design Document

The primary policy recommendations in the Design Document address some of the following key issues:

WCI Cap-and-Trade Program: The central component of the WCI’s comprehensive strategy is a regional cap-and-trade program that will be composed of WCI member jurisdictions’ cap-and-trade programs implemented through state and provincial regulations. The WCI program design encompasses almost 90% of economy-wide emissions in WCI jurisdictions. Each member jurisdiction implementing a cap-and-trade program will issue “emission allowances” to meet its jurisdiction-specific emissions goal. The total number of available allowances serves as the “cap” on emissions. A regional allowance market is created by the member jurisdictions accepting one another’s allowances for compliance. The allowances can be sold between and among covered entities as well as by third parties. This “trading” of emission allowances keeps costs low because it provides flexibility in how and when reductions are made. For example, entities that reduce their emissions below the number of allowances they hold can sell their excess allowances or “bank” them for later use. Selling excess allowances allows entities to recoup some of their emissions reduction costs, while banking allowances will lessen future compliance costs.

The WCI program design also includes important features to ensure that the program achieves regional emissions in a cost-effective way. For instance, emission offsets from sources not covered by the program can be used in limited quantity along with emission allowances to comply with the program. Allowing entities to turn in allowances in three-year periods provides flexibility as to when emissions reductions are made. To address unforeseen circumstances that could lead to increased program costs, WCI member jurisdictions are considering a number of options including an allowance reserve in the event of high-price conditions, increased flexibility regarding compliance periods, and special purpose mechanisms to address specific local conditions.

Not all WCI member jurisdictions will be implementing the cap-and-trade program when it is scheduled to start trading in January 2012, however those expected to move ahead (including Québec, Ontario, BC, New Mexico and California) comprise approximately two-thirds of total emissions in the WCI. According to the WCI, this represents a critical mass and a robust market for achieving significant GHG emissions reductions.

Between now and the planned program start date of January 2012, WCI member jurisdictions will address remaining program design issues and take the steps necessary to make regional trading operational. In addition, they will expand their efforts to develop and implement other core policies and programs to increase energy efficiency and fuel diversification in order to reduce GHG emissions.

Relying on High-Quality Emissions Data from Rigorous Reporting: The WCI understands that accurate, timely and consistent GHG emissions data is essential for effective GHG reductions. As a result, WCI member jurisdictions have developed a reporting program that specifies quantification methods that are rigorous, technically feasible, cost-effective and sufficiently accurate to support the cap-and-trade program. To minimize the reporting burden in the U.S., reporting requirements have been harmonized with U.S. EPA Mandatory Reporting Rule for GHG emissions.

For further information on the EPA’s GHG reporting requirements, please see Link

This way a facility will be able to submit a single report satisfying both WCI and EPA requirements. WCI member jurisdictions in Canada (including Québec, Ontario and BC) have developed their own reporting requirements, which will likely be set up as a one-window GHG emissions reporting interface with Environment Canada. This one-window reporting would meet the requirements of both the federal and provincial governments, thus eliminating the need for duplicate reporting.

Designing for High Quality Offsets: The proposed WCI cap-and-trade system includes offsets to reduce compliance costs by introducing a broader range of emission reduction opportunities. A particular emphasis has been placed on assuring the quality of offsets. The WCI recommend the following for the definition of an offset and criteria to evaluate an offset project:

• Definition: A GHG offset is a reduction or removal of GHG emissions as a result of a project or activity that occurs outside the sectors regulated by the cap-and-trade program. An offset certificate issued by a WCI Partner jurisdiction represents a reduction or removal of one metric ton of CO2e. To be issued an offset certificate by a WCI Partner jurisdiction, each reduction or removal must meet all recommended offset criteria, have clearly identified ownership, follow an accepted protocol, and result from a project located in Canada, the U.S., or Mexico.

• Criteria: Offset projects approved by WCI Partner jurisdictions will meet the criteria described in the Offset System Essential Elements Final Recommendations (June 2010). The criteria recommended by WCI Partner jurisdictions are consistent with the leading offset systems in use worldwide, and will allow the adoption of protocols that produce consistent offsets across the WCI region. The other North American emissions trading systems – RGGI and the Midwestern Greenhouse Gas Reduction Accord – share the goal of ensuring the quality of offsets. The three regional programs released a paper on offset quality (Ensuring Offset Quality: Design and implementation Criteria for a High Quality Offset Program, May 2010) that is consistent with the offset criteria recommended by the WCI Partner jurisdictions.

The Design Document indicates that WCI member jurisdictions will leverage existing protocols to align with the essential criteria and will continue to establish key protocol components for each priority project type. The process of offset project approval through certificate issuance contains important features to ensure offset quality. These processes, which continue to be finalized, will include specific requirements for registration, validation, monitoring, quantification, reporting, verification, certification and issuance of offsets.

Other policy recommendations addressed in the Design Document include:

• setting program emissions limits;

• enhancing compliance flexibility and program adaptability to manage compliance costs;

• maintaining competitiveness and preventing emissions leakage;

• electricity sector;

• designing a fair and transparent auction;

• ensuring a well-functioning market;

• linking programs; and

• coordinating program administration.

To access the complete Design Document, please refer to the WCI Link on this site.