ieta ghg 2010 report final

8/9/2019 IETA GHG 2010 Report Final

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IETA - MAKING MARKETS WORK FOR THE ENVIRONMENT

GREENHOUSE GAS MARKET

2010


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Post Copenhagen and Climate Policy:Where Global Emissions Trading Goes from Here

Editor:Arielle Kramer

Editorial Board:Jeanne Ng, Anne-Marie Warris, Jose Luis Pastor Morate, Lee Solsbery, Karen Degouve, Mark Proegler

Cover Design:Brian Thomsen

Internal Design:

Siegmund Schlag, Heiko Ulrich, www.formgeber.de

Acknowledgements:IETA expresses its gratitude to all the authors for their contributions and all those who worked on the publication.

Disclaimer:The views expressed in this publication are those of the authors and do not necessarily represent the views of the Editor,IETA or its member companies.

Contact:

International Emissions Trading AssociationRue Merle dAubgin, 24

Genve, Switzerland, CH-1207

Tel: +41 22 737 0500

Fax: +41 22 737 0508

Web: www.ieta.org

Email: [email protected]

International Emissions Trading Association (IETA). This document may be freely used, copied and distributed on the

condition that approval from IETA and the Author(s) is rst obtained and that each copy shall contain this copyright notice.

Greenhouse Gas Market Report 2010

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Introduction

Tere is much that can besaid regarding climate pol-

icy and the carbon markets

over the past year. Te im-

pact on markets o what has

occurred cannot yet be ul-

ly understood. However, we

do know that what started

as a promising beginning or

the establishment o new and

bigger markets, and the ex-

pansion o existing markets

to reduce greenhouse gas emissions -- and thereby mitigate

climate change at the lowest cost and drive innovation --

did not end that way. Lets review the bidding.

With a new U.S. President supportive o climate change leg-

islation, and large Democratic majorities in both Houses o

Congress, many believed that the prospects or climate leg-

islation in the U.S. had never been better. Tis optimism

increased when the U.S. House o Representatives passed

the American Clean Energy and Security Act in June o

2009. However, the eort bogged down in the U.S. Senate,

and many Washington observers now believe that the U.S.will not adopt climate legislation in this Congress. Although

no one can be certain as to when the U.S. may act, cap-and-

trade and all o the market mechanisms which are critical in

IEAs view to address climate change took a real hit in the

media and that also means the Congress. Tere contin-

ues to be a lack o understanding among U.S. policy-makers

as to how these mechanisms work, and their benets or re-

al people and the economy at large. Although we developed

a communications initiative to respond to continued attacks

on markets, the resources were not available to mount a ull-

scale response. Many also believed that the political dynam-

ics in Australia -- the other industrialized country that didnot ratiy the Kyoto Protocol or adopt a national eort to

curb its greenhouse gas emissions -- were moving in a direc-

tion that would lead to action. Aer several tries, this eort

appears to have stalled.

Tere are also signicant uncertainties with respect to the

direction o the international talks on the successor agree-

ment to the Kyoto Protocol. Much continues to be written

and said about the Copenhagen negotiations, but ew agree

as to when there may be a legally binding agreement that

would limit emissions and create new market mechanisms

to reduce emissions at the lowest cost.

Te only consensus we have is that we may be a ew yearsaway and many question whether the current process is ad-

equate to get the job done. As a result, we will have a gap be-

tween the time Kyoto expires and the implementation o a

new agreement with ully unctioning mechanisms capa-

ble o achieving economic and environmental objectives.

Tis has and will create uncertainty among market partici-

pants regarding the uture. Te eect is to slow investment

in emission-reducing activities.

Tere have been some positive developments in 2009. Te

EU continues to move orward with developing and im-

plementing Phase III o its trading program. Many observ-

ers are optimistic that the decision o key developing coun-

tries to associate themselves with the Copenhagen Accord

opens the door or them to agree to limits their emissions in

the uture. However, I believe that the negatives outweighed

the positives or IEAs members in 2009 and, important-

ly, or societys uture eorts to address climate change in a

way that achieves the greatest environmental benets or the

least amount o cost. Many will tell us that this was inevita-

ble given the market turmoil that started in the all o 2008,

and which continues as o this writing with the economic

challenges aced by European nations. In short, supporterso emissions markets took a pounding in 2009. Tose op-

posed to policies that would create markets to address cli-

mate change are aggressive and well unded. Emphasizing

abuses and problems caused by markets is easy. Eective-

ly communicating benets o markets is much harder. Te

eect is that support or market mechanisms among poli-

cy-makers may be at its lowest point since the climate de-

bate started.

What can we do to turn the tide? I know it is a challenge,

but both IEA and its members need to be leaders in this

battle. Our members and the planet have so much at stake.It is never easy to lead. It is always hard. It is hardest now

when markets have become tarnished by abuses, and when

millions o people have been adversely aected by the eco-

nomic turmoil o recent years. However, i we individual-

ly and collectively do not aggressively champion the use

o markets to address the enormous challenge o climate

change, who will? We know that no others can. I markets

are not used to address climate, more imperect policy in-

struments will be chosen. I more traditional policies are

used to address climate change, greater amounts o resourc-

es will be devoted to solving this problem at a time when we

need to use them as efciently as possible to address global

Message from the Chairman

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economic challenges. Te eect will be slower growth withadverse impacts on all. I urge both IEA and its members to

be vocal in our eorts to champion the use o markets to ad-

dress climate change. We need to aggressively communicate

the benets o markets in addressing climate change with

the media and policy-makers. Tis is the only way to build

support or our mission and our policy positions that we

know are the right ones.

We have made progress as an organization this past year

in engaging in the climate debate. Aer the economic cri-

sis in 2008, it has taken a year to rebuild our membership

and thereore our nancial resources. We are now com-prised o approximately 180 corporations rom the indus-

trial and service sectors. We have renewed our presence in

Brussels and oronto, and expanded our ofces in Gene-

va and Washington, D.C. Te eorts o our working groups

and the IEA Secretariat have continued to positively eect

the policy-making process in 2010. All o this activity en-

sures that IEA is recognized by business, government, and

the environmental and research communities as the private

sector source o inormation on issues that can aect the

carbon market. We have and will continue to examine and

comment on existing and proposed policies and their im-pacts on the market. IEA is uniquely positioned to provide

its views on the composition o demonstrably air and trans-

parent GHG markets. As we afrm in our vision statement,

IEA is dedicated to the establishment o eective market-

based trading systems or greenhouse gas emissions.

Te year ahead will be one o continued growth and chal-

lenges or IEA and its members. Climate policy is tak-

ing shape in the EU, Japan, Korea and elsewhere around the

world, while in the U.S., Capitol Hill digs into a new com-

prehensive proposal. IEAs work in promoting the CDM

and its reorm work becomes ever more important, and ourdiscussions on new nancing mechanisms should garner

the attention o market participants.

In this, my last year as Chairman o IEA, I look orward to

working with all o you to aggressively promote our agenda

throughout 2010.

Jack Cogen

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Message from the President

Tis 2010 GHG Market Re-port, Post Copenhagen and

Climate Policy: Where Glo-

bal Emissions rading Goes

rom Here covers a wide va-

riety o topics and regions

and is more comprehen-

sive than ever . Articles in

this years Report cover the

current challenges and the

development o emissions

trading systems spanning

the globe. I am sure any readers understanding o the stateo global carbon markets will broaden aer reading this re-

port.

Aer the dust settled in Copenhagen, the EU ES re-

mained the cornerstone o the global carbon market. How-

ever, while European policy makers hustle to wrap up EU

ES Phase III design elements, the policy debate over the

next year will ocus primarily on the US Congress and their

attempts to legislate or a comprehensive climate policy.

Country commitments made in Copenhagen or just beore

have also stirred activity in Japan, South Korea, China, In-dia, and many other countries around the world, which are

also drawing increased attention. Te Reports country-spe-

cic articles are wide-ranging and cover all o these topics.

Furthermore, new nancing mechanisms or public-private

engagement are well eatured in this edition.

Te CDM has aced diculties over the past year primari-

ly as a result o the late-2008 nancial crisis as well as policy

uncertainties about demand and rules post 2012. Just as the

need or more widespread, deeper emissions mitigation pol-

icies are recognized and may be put into place, investment

appetite in the CDM is waning. Te CDM will continue tounction as a secure global oset mechanism though it is

in need o urther reorm and attention. It needs to be un-

derstood that, i new and increased sources o demand or

emissions reductions do not materialize in the near uture,

investors will increasingly consider alternative investments

that are supported by more reliable long term policies i

there is a prospect o a commercial return.

Tis has already been a testing year or carbon markets inseveral jurisdictions. Te EU ES has appeared to be rid-

dled with problems over phishing, the recycling o CERs

and a VA raud scandal. Unortunate delays in the emer-

gence o new markets look certain. Australias Prime Minis-

ter, Kevin Rudd, recently announced that economy wide cli-

mate policy will not be taken orward until at least 2013, a-

ter a general election is held, and the US Senate has strug-

gled to recently release wide-ranging climate and energy

legislation.

Regardless o these tribulations, interest and activity in

the carbon markets over the past year has been consider-

able. IEA has responded by increasing ocus on emerg-

ing markets, CDM reorm, and the ongoing negotiations or

a post-2012 international agreement. As IEAs member-

ship grows, so does its capacity to contribute to the debate

around putting in place a global emissions trading system,

built on a solid oundation. Our activities and initiatives re-

fect our long history o dedication to international emis-

sions trading.

Te papers in this publication refect the experiences and

views o our membership and invited guests, refecting up-on their insights to the development o emissions trading

around the world. Tey tell stories o growth and evolution

and will shed new light on the global GHG marketplace.

Henry Derwent

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v

Contents

Introduction

00 Message from the Chairman iii00 Message from the President iv

Overall Market Developments

01 The Cap-and-Trade politics of Washington 2David Hunter, IETA

02International Offsets and US Climate Legislation 4Kyle Danish and Megan Ceronsky, Van Ness Feldman, P.C

03 The Lay of the Land: US Greenhouse Gas Offset Policy in 2009 9Alexia Kelly, World Resources Institute

04 Key Policy and Financing Developments in Chinas Low Carbon Generation 14Giuseppe Jacobelli and Dr. Jian Liang, CLP Holdings Ltd.

05 Where next for Australia? 22Gwen Andrews, Alstom Power Systems

06 India Policy and COP-15 implications 24Malini Mehra, Centre for Social Markets

07 Canada: Climate Apathy Slows Carbon Markets 27Dr. Robert Page, University of Calgary

08 Russian Climate Policy: Home and Away 29Anna Korppoo, the Finnish Institute of Foreign Affairs, and Thomas Spencer, German Watch

09 Emission reduction proposals of emerging economies 33Niklas Hhne, Ecofys

10 The Carbon Labyrinth: the Rules Governing the use of EUAs, CERs and ERUs in the EU-ETS until 2020 38Mark C. Lewis, Deutsche Bank

11 Progress of Climate Change Policies in Korea 43CJ Park, IETA12 Developments in the New Zealand Emissions Trading Scheme, 45

Gwen Rashbrooke, New Zealand Ministry for the Environment

13 Fundamentals of Japanese Carbon Market 48Hiroshi Tomita, BNP Paribas Tokyo

14 Early GHG Reduction Actions from Taiwan Industries 53Hui-Chen Chien, Environmental Protection Administration, R.O.C. & Wen-Cheng H ,Chen-An Lien,Fei-Chiao Yang, Li-Ying Hsu, Chen-Chiu Tsai, Industrial Technology Research Institute, R.O.C


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vi


Expanding Upon Carbon Markets

15 U.S. Policy Developments on Carbon Market Oversight 59Dirk Forrister, Managing Director, Natsource and Chairman, IETA U.S. Market Oversight Working Group

16 Moving towards a global carbon price: A domestic affair? 65Trevor Sikorski, Barclays Capital

17 Is A US Carbon Market Finally On the Horizon? 68Tim Juliani and Janet Peace, The Pew Center on Global Climate Change

18 Aviation under the EU ETS 70Brian Pearce, International Air Transport Association

19 EU ETS Auctioning Design at the crossroads 74Bernd Mack and Sabina Salkic, EUREX

20GHG Accounting and verication for the EU ETS in Phase 3 79

Madlen King, LRQA

21 The How, Where and When of ETS Auctions 82Paul Dawson, RWE Supply and Trading

22 Maritime Transport and Carbon Trading 86Robert Ashdown, UK Chamber of Shipping

23 The Rocky Road to Transparency: Measurable, Reportable, and Veriable (MRV) in a futureClimate Change regime 90Jane Ellis, OECD & Sara Moarif, IEA

24 Copenhagen and the Implications for Supply and Demand Dynamics in the Global Carbon Market 94Guy Turner, Bloomberg New Energy Finance

25 Competitiveness Concerns and Climate Change: The Role of the WTO 98Michael Jelenic, World Bank

Flexible mechanisms

26 Has CDM Delivered what it promised? An analysis of CDM in Brazil 102Clio Andrade, Federal University of Bahia., Luis Felipe Nascimento. Federal Universityof Rio Grande do Sul (UFRGS).,Jos A. Puppim de Oliveira, United Nations University Institute of Advanced Studies (UNU-IAS)

27 Improving regional representation: Practical measures to take the carbon marketsto Least Developed Countries 106Dawda Jobarteh Africa Progress Panel, Guido Schmidt-Traub, Africa Progress Panel and South PoleCarbon Asset Management

28 Copenhagens Verdict on CDM and JI 111Carina Heimdal, Point Carbon

29 Scaled-up Market Mechanisms: What is Needed to Move Forward? 114Aasurd, A, Baron R, (IEA), Buchner B (CPI), Ellis J (OECD)


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vii

Technology & Finance

30 Current and Future Investment Climate 118Geoff Sinclair, Standard Bank

31 New Financing Schemes to Foster Low-Carbon Technologies in Asia 122Acharya, J, Thapa, R, and Kubo, T, Asian Development Bank

32 Carbon Pricing and Technology Deployment 126Emmanuel Fages, Orbeo

33 Technology: The Wild Card 130Dan Whaley, Climos

34 Mobilizing Private Capital for Low-Carbon Investments in Emerging Markets 132 Vikram Widge, Shilpa Patel, Alan Miller, International Finance Corporation (IFC)

Sinks

35 Agriculture in an ETS: developments in Australia and New Zealand 136Brett Janissen and Astrid Edwards, Asia-Pacifc Emissions Trading Forum (AETF)

36 Carbon Capture and Storage: Implications from Copenhagen 140Brendan Beck, IEA & Tony Beck, AETF

37 Heading towards a Fragmented Framework?: The Current State of the UNFCCC REDD Discussionsand the Need to Engage the Private Sector 143Kim Carnahan, IETA

The Voluntary carbon market

38 Properly Structuring the Transition to a Compliance Regime:Effectively Leveraging High Quality Voluntary GHG Programs 148David Antonioli, Voluntary Carbon Standard Association

39 Trailblazers: Voluntary Carbon Markets 152Marianne Osterkorn, REEEP


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The Cap-and-Trade politics of WashingtonA number o pundits and editorials, including the New York

imes, have recently pronounced cap-and-trade dead. Tey

point to the persistent attacks rom conservatives and a ew

industry segments against the House-passed bill introduced

by Congressmen Waxman and Markey, the Senates di-

culties in trying to determine whether immigration or cli-

mate should be debated rst, the ar les ear o markets,

the rights claims that cap-and-trade is really a tax, and e-orts by many politicians, including such long-time cham-

pions as Senators John Kerry, Lindsey Graham, and John

McCain, to distance themselves rom cap-and-trade. But,

those pundits have it all wrong. Cap-and-trade is still very

much alive.

Te battle to pass climate legislation is a little like an elec-

toral campaign with three candidates: Cap-and-rade, Car-

bon ax, and Command and Control. Despite Cap-and-

rades diculties, it is still the clear leader. Te President,

the Speaker o the House, the Senate Majority Leader, and a

majority o both the House and Senate all support cap-and-trade. In contrast, its hard to nd even a handul o mem-

bers in either chamber on record in support o a carbon tax,

and I dont know o a single member who is arguing that the

EPA should simply go ahead with its command-and-control

approach. Public views seem similar: a January 2010 public

opinion rom Yale University, or example, shows that 58%

o the public supports cap-and-trade, compared to just 34%

or a carbon tax.

rue, Cap-and-rade is not polling as high as it once did.

But what candidate is? Many Americans have lost their

jobs; home owners have seen the value o their homes plum-

met, and once hopeul retirees have watched the value otheir savings crash along with the stock market. People are

not happy, and the polls show it. It is generally assumed that

Republicans will make inroads in the midterm elections, but

look at their numbers: just 28% o Americans say they ap-

prove o the Republican Party, while 51% say they disap-

prove. President Obama is doing better, but not well: a re-

cent poll shows that 46% o Americans approve o his job

perormance, while 48% disapprove. Numbers in the Sen-

ate are worse: For the 38 Senators on whom Public Poli-

cy Polling conducted polls in the last 6 months, the average

approval rating was just 40%. Conventional wisdom says a

candidate polling below 50% is in trouble, but how does the

math add up when everyone is unpopular? o quote the

pollsters: 40 may be the new 50. By that standard, cap-

and-trade is looking pretty goodand would be the clear

winner i an election were held tomorrow on how to solve

climate change.

O course, you still have to hold the electioni.e. a conclu-

sive voteand that is a challenge. Te leading climate pro-

posal in the Senate is the Kerry-Graham-Lieberman (KGL)

bill, and its supporters have been trying to bring it to a vote

on the Senate oor or months.

I should note that, as I write this, I still havent seen the bill,

so I can only surmise what it contains and who may support

it. Nevertheless, the bills sponsors, Senators Kerry, Graham,

and Joe Lieberman, deserve credit. Tey appear to have at

least a passing shot o producing a bill that will have utility

sector support, mixed-support rom the oil sector, reason-

able support rom industry, a air degree o environmental

support, and a real shot at passing into law.

Whats it take to get a bill like this to pass the Senate? Tere

are two options: bring a bill to the oor and immediate-

ly le or cloture, which is the only way to end debate and

orce a vote in the Senate. Or, alternately, give Senators a ullopportunity to debate the bill, ofer amendments, and vote

on each amendment.

Te ormer approachthe quick and easy oneis likely to

happen i the outcome is known in advance, whichever out-

come that may be. I it is clear KGL does not have the 60

votes necessary to pass, the Majority Leader could bring the

bill to the oor or a quick vote just to show they tried, but

without wasting too much time on it. Alternately, i Sena-

tors Kerry, Graham, and Lieberman manage to produce a

compromise that 60 Senators agree to in advance, the Ma-

jority Leader could simply hold the cloture vote and pass the

bill.Getting 60 o the 100 Senators to agree to pass a bill up ront

is unlikely, which brings us to the second optionull de-

bate and amendments.

Most o the issues involved in this bill have never beore

seen votes in the Senate. Te Senate has never taken a vote

on the total number o ofsets that should be included in cli-

mate legislation, the proportion o these that should be do-

mestic, how many should come rom agriculture or orest-

ry, how to treat international ofsets, etc. Nor has the Sen-

ate ever voted on how to distribute allowances or associat-

ed revenues. How much revenue should go towards devel-

oping CCS, and how much towards REDD projects? How

much towards low-income assistance, how much as divi-

dends back to ordinary citizens, and how much to trade-ex-


2


01.

The Cap-and-Trade politics of WashingtonDavid Hunter, IETA


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posed industries? Senators are a vocal and opinionated lot,

and it would be difcult indeed to nd 60 who would be

willing to orgo debate on these issues in avor o a bill cra-ed primarily by just three Senators.

Tat means a long debate and opportunity or amendments

will be necessary beore the bill passes. How long does it

take to have a serious debate on a lot o difcult issues which

have never beore seen Senate votes? Te 2001 Senate Ener-

gy Bill is a good example. Tat was the rst time the Senate

had taken up a comprehensive energy bill in a decade, and

many o the issues were new, or at least new to the Senators

then in power. It took eight weeks o debate. In the end the

bill passed the Senatebut too late in the year to be able to

make it through conerence with the House o Representa-

tives. Te Senate took the bill up again the next year, and,

since the issues had already been debated the year beore,

Senators were willing to let the bill move quicker with less

debateonly 6 weeks that time. Nevertheless, the bill ailed

again. It passed the House, passed the Senate, and went to

conerence. But the House had produced quite a dierent

bill rom the Senate, and the two had to be reconciled. Te

conerence committee came back with a compromise, but

the revised version did not have enough support to over-

come a Senate libusterand down it went. Again. In the

end, it took ve years to pass a bill.

Te point is, it is very difcult to pass a major bill on a com-plicated issue into law in the U.S. But just because the lat-

est bill has not easily sailed through into law does not mean

cap-and-trade is dead. Even though it is extremely difcult

to bring a bill to a successul vote in the senate, the issue just

comes back again the next year, and so on until it passes.

Te alternatives o command-and-control and carbon-tax-

es have gained little ground, while cap-and-trade has made

substantial progresspassing the House, passing Senate

Committee, and orming the backbone or a compromise

in the Senate with broad support rom many sectors. Cap-

and-trade still holds the lead.

One thing that has made things particularly difcult thisyear is that climate change has allen among American con-

cerns. According to a Yale University poll, the percent o

the public that believes climate change is happening ell

rom 71% in October 2008 to 57% in January 2010. Te

percent o Americans somewhat or very worried about

climate change ell 13 points over this same period, to just

50% o the public now worried about the climate.

But the issues at the top o the publics mind wax and wane:

environmental concerns all during tough economic times

and rise when times are good. What is more, economic col-

lapses aside, concerns about the climate tend to rise as the

science advances and as the climate warmsboth o which

trend in a single direction. Tere was a lot o pressure to

hold the climate election even in a year in which the public

was not particularly ocused on climate, and that pressure is

likely to increase.

o be sure, there are some in Congress who avor a do-

nothing approach and would vote to put o the election in-

denitely. But there is one overpowering reason why their

cause is utile: the Supreme Court. Te Supreme Court ruled

that the Environmental Protection Agency must regulate

greenhouse gas emissions under the Clean Air Act. While

there may be some potential or EPA to implement a limited

cap and trade approach under this act, EPAs broad authority

clearly alls into the category o command-and-control. In

other words, i Congress ails to hold a conclusive election

on the climate candidates, the least popular one wins by de-

aultstarting in January 2011, when the EPA greenhouse

gas regulations or stationary sources kick in.

O course, Congress could attempt to block EPA action

but that would also take 60 votes. Even i the Republicans

pick up a hal a dozen seats in the senate, there still wont be

anywhere near 60 votes in avor o doing nothing. Te ma-

jority o Congress considers climate change to be a problem,

even i theyre having trouble agreeing on the exact details o

the solution.

All o this means that Congress will be orced to act soon.

Te clock is ticking on the EPA regulations, so Congress

needs to pass something that replaces EPAs command-and-control authority with the preerred avorite o cap-and-

trade. It is true that it is a difcult economy, a difcult polit-

ical climate, and just about everyone and every issue is su-

ering in the polls. But o the climate change candidates,

Cap-and-rade remains the overwhelming avorite, and the

climate election is not ar away.

The International Emissions TradingAssociation (IETA)is a non-prof t business organisation that works toward a

unctional international ramework or trading in greenhouse

gas emission reductions. Te IEA membership includes over

180 companies rom across the globe and the emissions trad-

ing cycle. David Hunter, Ph.D., is the Director o US Policy

or IEA. He previously spent nine years in the US Senate de-

veloping energy, climate, and environmental policy, traveled

to the South Pole with Senator John McCain in 2005, and did

his Ph.D. on climate variability.

3


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I. IntroductionTere are strong drivers supporting the integration o inter-

national osets into U.S. climate legislation, including the

dramatic cost savings they promise, and their role in pro-

moting action by other countries. What remains uncertain

(beyond the timing o U.S. legislation) are the conditions

under which international osets will be utilized, and any

quantitative limits on use. An international osets program

constrained by impossible-to-meet criteria or with mechan-

ics that generate high levels o market uncertainty may not

dier signicantly rom a domestic-only osets program.

For these reasons, there is work le to be done to urther ed-

ucate policy makers about the benets o international o-

sets and the necessary elements o a unctional internation-

al osets program.

Te year 2009 was the rst year that a chamber o the U.S.

Congress voted in avor o regulating greenhouse gas emis-

sions. In late June, the U.S. House o Representatives passed

H.R. 2454, the American Clean Energy Security Act o 2009(Waxman-Markey), an energy and climate package includ-

ing an economy-wide cap-and-trade program.

Action then shied to the Senate, where Senators Barbara

Boxer (D-CA) and John Kerry (D-MA) introduced S.1733,

the Clean Energy Jobs and American Power Act (Ker-

ry-Boxer). Although their bill passed out o Senator Box-

ers Environment and Public Works Committee, it has been

roundly criticized by Republicans and moderate Democrats,

and has been overshadowed by eorts to create a compro-

mise climate change legislative package led by Senators John

Kerry, Lindsey Graham (R-SC), and Joe Lieberman (I-C).

During the nal months o 2009 and the beginning o 2010,consideration o climate change legislation in the Senate

took a backseat to eorts to pass health care and nancial

reorm legislation. As we write this article, the politics o

immigration reorm have threatened to arrest development

o a comprehensive climate-energy bill in the Senate. As

the 2010 midterm elections draw ever nearer, the likelihood

that the Senate will take a dicult vote, such as on a climate

bill, grows smaller. Nonetheless, eorts to cra a bill that

can garner the magical number o Senate votes sixty are

needed to overcome procedural opposition by Republicans

continue, i perhaps not apace. And, in any event, even i

legislation does not pass in 2010, the deliberations that oc-

cur on international osets this year will be important be-

cause each new eort in the U.S. Congress has built substan-

tially on previous eorts.

Section II o this article discusses the drivers supporting

the integration o international osets into U.S. greenhouse

gas mitigation eorts. Section III provides an overview o

the dierent sources o resistance. Section IV describes the

treatment o international osets in current climate legisla-

tion. Section V concludes with a discussion o what to look

or as work on climate legislation continues.

II. Factors Favoring Inclusion ofInternational Offsets

A. Cost SavingsTe most powerul driver behind inclusion o international

osets in U.S. climate change policies is, by ar, the cost sav-

ings they can provide. All o the major analyses o U.S. cli-

mate legislation project that emission reductions and se-

questration achieved in developing countries, primarily in-volving reductions in tropical deorestation, will be achieva-

ble at signicantly less cost than most reductions in capped

sectors in the United States, and in the near term. Te U.S.

Environmental Protection Agencys (EPA) analysis o the

cap-and-trade program in the Waxman-Markey bill as-

sumes use o over a billion tons o international osets rom

the beginning o the program.1 Without any international

osets, the analysis projects that allowance prices would be

89% higher.2

Unsurprisingly, the capped sectors o the U.S. economy have

been strong advocates or osets, and or international o-

sets specically. Te United States Climate Action Partner-ship (USCAP), a coalition o major businesses and environ-

mental NGOs that was very infuential during the draing

o the Waxman-Markey bill, has repeatedly called or am-

ple use o domestic and international osets to provide cost

1 Environmental Protection Agency, EPA Analysis of the Amer-

ican Clean Energy and Security Act of 2009 H.R. 2454 in the111th Congress, June 23, 2009, at 38.

2 Id. at 3.

4


International Offsets and U.S. Climate LegislationKyle Danish and Megan Ceronsky, Van Ness Feldman, P.C.

02.


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containment.3 In November o 2009, a group o eighteen

major employers wrote to the Senate urging the chamber to

incorporate a robust role or international osets in climatelegislation to protect U.S. jobs.4

B. Environmental and social co-benetsIn addition to cost savings, international osets oer a va-

riety o environmental and social co-benets. Tese bene-

ts are a second major driver supporting international o-

sets in the context o U.S. climate legislation. REDD proj-

ects projects or Reducing Emissions rom Deorestation

and Forest Degradation generate the most political capi-

tal, as they oer a means to channel signicant private sec-

tor unding into preserving the worlds tropical rainorests

and all the biodiversity and ecosystem services they provide.Other oset project types also yield environmental co-bene-

ts by reducing non-greenhouse gas pollutants and increas-

ing habitat area. International oset projects could also gen-

erate a sustainable income source or local communities.

C. Promoting Mitigation Commitments fromDeveloping CountriesTe third major driver or international osets is the role

they play in international diplomatic negotiations around

climate change. In the Copenhagen Accord, developed

countries committed to provide adequate, predictable andsustainable nancial resources, technology and capacity-

building to support the implementation o adaptation action

in developing countries.5 International osets oer a way

to unnel private sector capital into developing countries.

Using osets to raise capital is ar less politically-sensitive

than asking the Appropriations Committees o Congress to

send U.S. taxpayer money overseas.

3 United States Climate Action Partnership, A Blueprint for Leg-islative Action: Consensus Recommendations for U.S. Climate

Protection Legislation, Jan. 2009, p. 8-11; United States Cli-mate Action Partnership, A Call to Action, Jan. 2007, p. 8; Unit-

ed States Climate Action Partnership, USCAP Recommenda-tions and Options on Offset Quality, Early Supply and Early

Emission Reductions from Industrial Sources, Dec. 14, 2009.These letters and a list of USCAP members are available at

www.us-cap.org.

4 The letter, which was sent on November 10, 2009, was coor-

dinated by the U.S. Coalition for Emission Reduction Projectsand addressed to Senators John Kerry, Lindsey Graham, and

Joe Lieberman, leaders of the current effort to craft a compro-mise climate package in the Senate. Signatories included Al-

pha Natural Resources, American Electric Power, DTE Energy,

Dominion, The Dow Chemical Company, Duke Energy, DuPont,El Paso Corporation, Exelon, Southern Company, FPL Group,

Intel, International Paper Company, NRG Energy, National Grid,PG&E Corporation, PNM Resources, and Rio Tinto. The letter

is available at www.uscerp.com.

5 Copenhagen Accord, available at http://unfccc.int/les/meet -

ings/cop_15/application/pdf/cop15_cph_auv.pdf.

III. International Offsets Skepticism in theUnited States

Notwithstanding their signicant benets, there is signi-cant resistance to international osets among members o

Congress. Tis reluctance is both multiaceted and to some

extent, nebulous it has not solidied into a well-organized

opposition, perhaps because it does not ollow either par-

ty lines or traditional lobbying coalitions. Yet, it has marked

the current legislative proposals.

One area o skepticism ocuses on the transer o money

(and jobs) to other countries (especially, o course, to Chi-

na). Another variation on this theme posits that interna-

tional osets will be too cheap, undercutting the market (or

at least the premium price paid) or domestic osets and do-

mestic natural gas.A dierent type o economic concern about international

osets holds that the cost savings rom such osets are over-

stated. Tere is a growing chorus o voices that says that

the EPA and others have relied on unrealistic assumptions

about the available supply o international osets.

Te environmental concerns with international osets all

into two categories. First, many environmentalists, and

their advocates in the Congress, do not have aith in the in-

tegrity o the Clean Development Mechanism, and are quick

to observe that the United States has no say in the opera-

tions o the CDM.Another environmental objection to international osets is

the concern that osets will be, in a sense, too eective in

reducing allowance prices, thereby signicantly reducing or

eliminating the need or domestic emission reductions by

capped sectors. Environmentalists and others worry that

this will diminish the demand or (and thus investment in)

the development o low-carbon technologies that will be

needed to achieve uture reductions.

IV. Treatment of International Offsets inRecent Legislative Proposals

Both the drivers or international osets and concerns aboutthem are clearly refected in existing climate legislation, with

a number o examples discussed below. O course, existing

legislation may not be making its way to President Obamas

desk anytime this side o the mid-term elections in Novem-

ber. Nonetheless, U.S. climate legislative proposals tend to

lean heavily on eorts rom prior Congresses, and the Wax-

man-Markey bill is noteworthy as the most ully developed

cap-and-trade program to date and as the rst to be passed

by a house o Congress. Even i a climate bill is not passed

this year, these elements are likely to reappear.

A. Quantitative LimitsBoth the Waxman-Markey and Kerry-Boxer bills impose

5


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limits on the number o osets that may be used to comply

with the U.S. cap, with the goal o restricting oset use to a

maximum o two billion tons annually. Te limit imposed

by the Kerry-Boxer bill is particularly problematic. It allowscapped entities to submit a quantity o oset credits that

is proportional to that entitys share o covered emissions.6

Only a quarter o the osets an entity may submit can be in-

ternational osets.7 Tis percentage can be increased to al-

low additional use o up to 750 million tons o international

osets, but that is only done i the number o domestic o-

sets available at or below allowance prices in a given year is

likely to be less than 900 million tons.8

Tis outcome is an example o how a successul political

compromise can create an unworkable policy outcome. Te

supply o international osets obviously cannot be turned

on or o like a spigot as envisioned by the Kerry-Boxer pro-visions. I the international osets market is not given a re-

liable signal o uture U.S. demand, it will be dicult to at-

tract capital to develop projects. I U.S. policy makers can

be made more amiliar with the importance o investment

certainty to generating oset supply, presumably a means

can be ound to avor domestic osets while still providing a

more predictable long-term signal o U.S. demand or inter-

national osets.

B. Penalty on Use of Offsets

Both the Waxman-Markey and Kerry-Boxer bills would re-quire capped entities to submit ve international oset cred-

its in lieu o our emission allowances beginning in 2018.9

Te penalty provision could be seen as achieving a number

o aims generating additional emission reductions, dis-

counting the value o international osets on the assump-

tion that they are not ully additional and real, and/or in-

creasing the value o domestic oset credits.

Tese provisions again call or an eort to educate poli-

cy makers. Any uncertainties about the integrity o an o-

set project should rightly be accounted or through the ap-

plication o conservative baselines and discounts in the con-

text o a project-type-specic methodology. Dierent typeso oset projects have dierent degrees and sources o un-

certainty. It is inecient, and thereore expensive, to im-

pose this type o across-the-board discount on all interna-

tional osets.

C. Host Country AgreementBoth Waxman-Markey and Kerry-Boxer require that the

United States and the host country o an international oset

6 Clean Energy Jobs and American Power Act, S. 1733, 111th

Cong. Division B, 101, proposed Clean Air Act 722(d)(1)(B)

(hereinafter CEJAP).7 Id. at 722(d)(1)(B)(iii).

8 Id. at 722(d)(1)(C).

9 ACES at 722(d)(1)(A, D); CEJAP at 722(d)(1)(A)(i), (D).

project be party to a bilateral or multilateral agreement that

ensures that the requirements or international osets are

met and provides or the distribution o oset credits.10

Aer consulting with the Department o State, the EPA, andoutside experts, the Congressional Budget Oce concluded

that negotiating such host country agreements would take

signicant time.11 Te requirement could severely constrain

international oset supply during the early years o a U.S.

cap-and-trade program.

In order to prevent the host country agreement rom delay-

ing the availability o at least those international osets that

come through the CDM, it would be useul to convince pol-

icy makers that a workable alternative would be to have the

EPA enter into an umbrella agreement with the CDM Ex-

ecutive Board. Under the current legislative proposals, the

EPA has an oversight role or all international osets in any

event. An EPA-CDM agreement would be an equally eec-

tive, and more ecient approach to providing the necessary

assurances than an approach in which the United States en-

ters into bilateral agreements with each host country.

D. Projects vs. SectorsBoth the Waxman-Markey and the Kerry-Boxer bills incor-

porate a strong emphasis on shiing rom project-level o-

sets to sector-based emission reductions trading or coun-

tries that are major economies.

Te sectoral crediting requirements refect dierent but mu-

tually reinorcing concerns. One goal o these provisions is

to prevent leakage the shiing o emissions rom the lo-

cation o an oset project to a dierent location in the same

sector o that country. Tis is one means o ensuring the

environmental integrity o emission reductions. At the

same time, by encouraging the adoption o sectoral emis-

sion baselines, the supporters o these provisions hope to re-

duce competitiveness impacts on U.S. industry and to re-

duce any incentive or capped industries to move to coun-

tries without emission caps. Sectoral policies are also seenas a way to transition developing countries towards adopt-

ing emission limits.

Te relevant provisions would require the EPA and the State

Department to identiy developing countries and speci-

ic sectors or which it is appropriate to credit emission re-

ductions against a sector-wide baseline rather than as indi-

vidual stand-alone projects.12 Sector-based crediting is to

be used or sectors and countries with comparatively high

greenhouse gas emissions, comparatively greater levels o

10 ACES at 743(b)(2); CEJAP at 744(b)(2)(C).

11 Congressional Budget Ofce, Cost Estimate of H.R. 2454,

American Clean Energy and Security Act of 2009, June 5,2009, at 16.

12 ACES at 743(c); CEJAP at 744(c).

6



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economic development, and/or or sectors that would be

capped in the United States. For such sectors, oset projects

would be credited against a domestically enorceable base-

line level o absolute emissions established in a country-spe-cic agreement.13 Te baseline would be below a projected

business-as-usual pathway.

However, both bills also provide that, starting in 2016, regu-

lated entities in the United States could no longer use Certi-

ed Emission Reductions rom projects in sectors and coun-

tries identied as appropriate or sectoral crediting.14 Tis

deadline appears to be motivated by a theory that the prom-

ise o income or CDM projects will cause developing coun-

tries to drag their eet in negotiating sectoral limits. Regard-

less o whether this is true, even i countries were negotiat-

ing in good aith, it is highly unlikely that sectoral trading

programs could be operational by 2016.

Requiring a phase-out o CERs beore sectoral programs

can be operational will simply shrink the quantity o inter-

national osets available to the U.S. market. It will take a

number o years to designate the appropriate sectors, nego-

tiate sectoral baselines, and implement a ramework to cred-

it projects against the baselines. Phasing out CERs rom the

designated sectors in 2016 would thereore unnecessarily

disrupt the supply o international osets something U.S.

policy makers may not yet ully appreciate.

E. REDDBoth the Waxman-Markey and Kerry-Boxer bills have ex-

tensive and detailed REDD provisions.15 Under the rame-

work they establish, countries with more than 1% o global

greenhouse gas emissions or more than 3% o global orest-

sector and land use change emissions must establish nation-

al deorestation baselines. Each baseline must refect histor-

ical deorestation data and establish a trajectory that results

in zero net deorestation within twenty years o its establish-

ment. Oset credits will only be issued or emission reduc-

tions measured against the national baseline. Only nationswith the technical capacity to measure and monitor deor-

estation emissions, the institutional capacity to reduce de-

orestation emissions, and a land use plan that assesses de-

orestation drivers and identies reorms needed to address

them will be eligible or participation.

States and provinces within developing countries may be el-

igible to establish a state- or province-wide baseline against

which REDD emission reductions will be credited or up to

ve years. Subsequently, the country must establish a na-

tional deorestation baseline to receive REDD oset credits.

13 ACES at 743(c)(3)(A).

14 ACES at 743(d)(1); CEJAP at 744(d)(1).

15 ACES 743(e); CEJAP 744(e).

Developing countries with less than 1% o global green-

house gas emissions and less than 3% o global orest-sector

and land use change emissions will be eligible to generate

REDD oset credits measured against a project-level base-line or ve years, aer which point a national deorestation

baseline will be required. Te phase-out may be extended

or up to eight years or least developed nations i they lack

the capacity to implement a national baseline.16

In addition to the baseline requirements, all REDD projects

must (1) adhere to sustainable orest management practic-

es; (2) promote or restore native orest species and ecosys-

tems where practicable; (3) incorporate ull participation o

local communities, indigenous peoples, and orest-depend-

ent communities in aected areas as partners and primary

stakeholders during all stages o project design and imple-mentation; (4) provide equitable sharing o prots and ben-

ets rom oset credits with local communities, indigenous

peoples, and orest-dependent communities.

Te environmental and social justice considerations that

animate these provisions are clear and laudable. Howev-

er, they raise at least two sets o issues or the marketplace.

First, the Day One requirement or national baselines in ma-

jor deorestation countries (such as Brazil) implies that a

project developer or investor would need assurances rom

the host government that its project will be credited withinnational baseline, irrespective o deorestation emission in-

creases elsewhere in the country.

Second, it likely will be challenging or many projects to

meet all o the social and environmental requirements, in-

cluding sharing o prots with local communities. I only a

small number o projects could conorm to these require-

ments, it is not clear whether the REDD program estab-

lished by these provisions would eectuate its goals o driv-

ing private sector unding into tropical orest preservation

and generating low-cost emission reductions.

Tird, it also seems likely that many countries will lack the

capacity to establish national deorestation baselines in the

near term, which will make those countries ineligible or

oset unding and reduce the available supply o interna-

tional oset credits during the early years o the cap-and-

trade program.

V. What to WatchTere is room or improvement in the international oset

provisions o existing U.S. cap-and-trade legislation. Te

16 Under Kerry-Boxer, the initial time period is eight years after

the rst covered entity compliance deadline, with the possibility

of a ve year extension. CEJAP at 744(e)(6)(D).

7


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current legislative trafc jam in the U.S. Congress though

it may delay serious consideration o climate legislation

may also provide time to educate policy makers about the

necessary components o a practical and eective interna-tional osets program, and the unintended consequences

likely to ollow implementation o certain provisions in the

Waxman-Markey and Kerry-Boxer bills.

Eorts to create a compromise climate legislative package

will likely continue in the Senate under the leadership o

Senators Kerry, and Lieberman, and hopeully Senator Gra-

ham. Even i a bill does not pass in 2010, their work will

very likely serve as the template or subsequent legislation.

Convincing the Senate to make a relatively small number o

strategic changes to the proposed international oset provi-

sions could make signicant progress towards meeting the

goal o creating a highly unctional international osets pro-

gram capable o achieving its environmental and cost con-

tainment purposes.

Van Ness Feldmanis a law rm with one o the worlds largest and most diver-

sied climate change practices. Market surveys in Environ-

mental Finance magazine have regularly rated the rm as a

leader in both the compliance and voluntary carbon markets.

Among the rms clients is the Coalition or Emission Reduc-

tion Projects, a coalition dedicated to educating the public

about the benets o allowing regulated entities to use credits

rom domestic and international ofset projects in GHG regu-

latory programs.

8



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9

2009 represented an important year in the development o

U.S. climate policy. As o this writing, the U.S. Senate con-

tinues to struggle to develop a bipartisan approach to cli-

mate legislation. Te U.S. House o Representatives passed

a comprehensive climate change mitigation bill in June o2009, marking a critical step orward. Concurrently, the U.S.

EPA continues to move orward to regulate greenhouse gas-

es (GHGs) under the Clean Air Act. Te composition o -

nal U.S. climate legislation remains highly uncertain, but

there is little question regarding the expected role that GHG

osets will play. GHG osets will play a key role both in get-

ting to 60 votes in the Senate, and in the implementation o

a U.S. cap-and-trade program. Tis article will discuss the

key elements o a likely U.S. oset program by examining

the similarities and dierences between and among the cur-

rently legislative proposals; including: limits on oset use orcompliance, potential oset project types and sources, geo-

graphic limits, credit or early action, and other important

design elements.

IntroductionTe year 2009 was an important year or U.S. climate poli-

cy. Te rapid advancement and passage o House Resolution

(HR) 2454, the American Clean Energy and Security Act

(also known as Waxman Markey) in June o 2009, height-

ened expectations that the U.S. would establish an emissions

trading system similar to that already in place in the Euro-

pean Union by 2012. Several bills have been introduced inthe Senate to this eect since the passage o Waxman Mar-

key, but the ate o cap-and-trade legislation in the U.S. Sen-

ate is still highly uncertain.

Te landscape o U.S. and international climate policy is

changing rapidly; so rapidly in act, its difcult to project

what could happen next week, never mind later this year.

As o this writing, Senators Kerry, Graham and Lieberman

(a Democrat, Republican and Independent respectively) are

working to advance tri-partisan legislation that would put

a price on carbon and is likely to include a declining cap on

emissions or at least the power sector, and perhaps also the

industrial sector aer a period o some years. Te transpor-

tation sector may be addressed through another approach

that would include a linked ee tied to the price o allow-

ances in the carbon market. As o this writing, the compo-

sition o the nal Senate bill is still unknown. However, one

element that is almost certain to be a part o any uture U.S.

legislative ramework is that o greenhouse gas (GHG) o-

sets (GHG osets).

GHG osets are emissions reduction, avoidance or seques-

tration projects implemented specically to compensate or

GHG emissions occurring elsewhere. Under existing in-

ternational emissions trading programs (e.g. the European

Union Emissions rading Scheme) they have been limited

to developing countries not subject to binding emission re-

duction targets under the Kyoto Protocol.

Tis article will examine the key elements o a potential

GHG oset program in the U.S., including: limits on osetuse, potential oset project types and sources, oset approv-

al and governance structures, and the role o early action.

Tis analysis will ocus largely on Waxman Markey, as the

bill arthest along in the Congressional approval process, but

will also explore relevant sections rom other bills currently

under consideration as appropriate. able 1 below, illustrates

the various bills that have been introduced in the 111th Con-

gress o the United States that address GHG osets and their

respective stages in the legislative process.

Both Waxman Markey (HR 2454) and Kerry Boxer (S.1733) are economy wide cap-and-trade programs that in-

clude a range o complementary policies to drive emissions

reductions in addition to those required by the cap. For ex-

ample, Waxman Markey establishes a 17% below 2005 emis-

sions levels reduction target by 2020, but also includes a

non-binding goal o 20% below 2005 levels by 2020.1

Stabenow et al. (S 2729) is not an economy wide cap-and-

trade program, but rather outlines requirements or the es-

1

Larsen, John; Kelly, Alexia: Heilmayr, Robert. World Resourc-es Institute. WRI Summary of HR 2454, the American Clean

Energy and Security Act (Waxman Markey). July 2009. http://pdf.wri.org/wri_summary_of_aces_0731.pdf

03.

The Lay of the Land: U.S. Greenhouse Gas Offset Policy

in 2009Alexia Kelly, World Resources Institute


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tablishment o a domestic oset program or the orestry

and agriculture sectors. Te bill includes a set-aside und

or emission reductions in domestic agriculture and orestry

and provides unding or rural renewable energy develop-

ment and research and development.

Limits on Offset Use

able 2 includes a summary o the limits on GHG osetcompliance use in the various bills currently under consid-

eration. Both Waxman Markey and Kerry Boxer require

that no more than 2 billion tons CO2e (2,000 million metric

tons carbon dioxide equivalent, or MMtCO2e) o GHG o-

sets may be used annually or compliance by regulated en-

tities.

o put this in perspective, under Waxman Markey the total

phase 1 cap on emission or the U.S. economy in 2012 is 4.6

billion tons and once the cap is ully phased in, the2020 lim-

it is 5.1 billion tons.2 According to the Environmental Pro-

tection Agency (EPA), total covered emissions (once the cap

is ully phased in) in 2005 were 6.1 billion tons.3 Tus, o-

set usage o 2 billion tons would represent twice as much as

the reductions rom 2005 levels required by the bills in 2020,

and nearly 40% o total US GHG emissions under regula-

tion (5.1 billion tons CO2e).4

Tis aggregate limit on oset use is implemented through afrm-level limitation. For example, in Waxman Markey the

total number o osets allowed per year (2 billion) is divided

among covered entities. Tis percentage limit will vary year

2Larsen, John. World Resources Institute. Emissions Reduc-

tions under Cap-and-Trade Proposals in the 111th Congress.December 17, 2009.

3REFERENCE EPAS ANALYSIS OF WM, Energy InformationAgency. http://www.eia.doe.gov/oiaf/1605/ggrpt/index.html

4 Including emissions caps and complementary measures, bothbills require emission reductions of about 2,200 MMT CO

2e rel-

ative to business as usual in 2020 per Larsen (2009)

10


Table 1. Summary of Legislation that Addresses Greenhouse Gas Offsets in the 111th Congress of the United States

Bill # Bill Name Sponsor (s) Key Features Status of Legislation

HR 2454 American Clean

Energy and

Security Act

Waxman and Markey Economy-wide (~85%) cap

Complementary energy policiesDomestic and international osets

Sot price collar

Strategic reserve

Passed House o Representatives June

2009

S1733 Clean Energy

Jobs and Ameri-

can Power Act

Kerry a nd Boxer Economy wide (~85%) cap

Complementary energy policies

Domestic and international osets

Firm price collar

Strategic reserve

Passed Senate Environment and Public

Works Committee November 2009

S2729 Clean Energy

Partnership Act

Stabenow, Baucus,

Klobuchar, Brown, Be-

gich, Harkin, Shaheen

Domestic agriculture and orestry oset

program

emission reduction and rural clean energy

incentive program

Introduced November 2009

Table 2. Summary of Limits on GHG Offset Compliance Use in Various Legislative Proposals in 111th U.S. Congress

Bill System Limit Firm Level Limit Domestic/ international Split Discount

HR 2454 2 billion Varies by Year

(based on equation,

e.g. ~30% in 2013,~65% in 2050)

50% Domestic

50% International

(can adjust to 25% domestic/ 75% internatio-

nal i less than 900 million tons available)

1.25 discount applied to internationalosets ater 2017

S1733 2 billion Varies by Year

(based on ratio o

frms total compliance

obligation)

75% Domestic

25% International

(can adjust to 63% international/ 37% dome-

stic i less than 900 million tons available)

1.25 discount applied to international

osets ater 2017

S 2729 No limit spe-

cifed

No limit specifed No limit specifed (does not address interna-

tional osets)

No discount specifed


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to year and is determined by the US Environmental Protec-

tion Agency (EPA) by dividing the number 2 billion by the

sum o 2 billion plus the number o emission allowances in

the previous years allowance budget and multiplying thatnumber by 100. For example the 2013 limit will be approx-

imately 30% o an entitys compliance obligation and the

2050 limit will be approximately 66%.5 In Kerry Boxer this

number is determined by the ratio o an entitys compliance

emissions to system-wide compliance emissions in the year

two years beore the current compliance year multiplied by

two billion.6

Because Stabenow et al. is only a domestic oset program

establishment bill it does not include provisions regarding

oset quantity limits, nor does it include a discount on o-

sets, which are discussed in the next section o this article. 7

Domestic or International Offsets?U.S. climate legislation will dier undamentally rom exist-

ing international emission reduction systems in that a large

amount o the supply o osets or use in the U.S. emis-

sions trading system is expected to be derived rom domes-

tic sources. Waxman Markey would cover (i.e. would be

subject to mandatory emissions reduction requirements)

approximately 87 percent o the economy once ully imple-

mented, which would leave approximately 13 percent o the

economy uncovered or not subject to mandatory emis-sions reduction requirements.8 Tese will include the orest-

ry and agriculture sectors, as well as some smaller sources o

methane emissions such as certain landlls and some min-

ing operations.

In Waxman Markey up to one billion domestically sourced

osets and one billion internationally sourced osets are al-

lowed into the system annually. Te limit on the use o in-

ternational osets or compliance can be adjusted by the US

EPA up to 1.5 billion in the event that less than 900 million

5 Kelly, Alexia. World Resources Institute. Summary of OffsetProvisions in HR 2454, the American Clean Energy and Securi-

ty Act. August, 2009.

6 Larsen et al. World Resources Institute. WRI Summary of S.

1733, the Clean Energy, Jobs and American Power Act (Ker-ry Boxer). October 2009. http://pdf.wri.org/wri_summary_ceja-

pa_2009-10-30.pdf

7 Kelly, Alexia. World Resources institute. WRI Summary of S.

2729 Clean Energy Partnerships Act of 2009. December 2009.

8 Larsen, John; Kelly, Alexia: Heilmayr, Robert. World Resourc-es Institute. WRI Summary of HR 2454, the American CleanEnergy and Security Act (Waxman Markey). July 2009. http://

pdf.wri.org/wri_summary_of_aces_0731.pdf

oset credits are available in any given compliance year.9

Kerry Boxer also allows up to 2 billion tons o osets to be

used annually or compliance, but allows up to 75 percent

o the two billion ton limit to be met with domestic osetsand up to 25 percent to be supplied by international sourc-

es. Tis limit must be adjusted (up to a maximum o 1.25

billion tons o international osets) i the Administrator o

the program (US EPA) determines that less than 900 million

tons o domestic osets are available at or below allowanc-

es prices. When this adjustment occurs the allowable lim-

it on domestic osets must be reduced by a corresponding

amount.10

In both bills entities wishing to use international osets to

meet a portion o their compliance obligation will be re-

quired to surrender 5 osets or every 4 allowances they

otherwise would have surrendered ( or 1.25 osets or every1 allowance substituted, which amounts to a 20 percent dis-

count) afer 2017.11

Potential Offset Project Types and SourcesTere are a variety o oset project types potentially eligible

under Waxman Markey, Kerry Boxer and Stabenow et al.

that are displayed in able 3.

Te provisions in both Kerry Boxer and Waxman Markey

allow designated U.S. ederal agencies, such as the US De-partment o Agriculture (USDA) and the US EPA, to prom-

ulgate rules and methodologies or the issuance and approv-

al o both domestic and international osets.

Under Kerry Boxer international oset credits may be is-

sued only i: 1) the U.S. is a party to a bilateral or multilater-

al agreement that includes the country in which the project

has occurred, 2) such a country is a developing country,12

3) the agreement ensures all requirements included in the


1733, the Clean Energy, Jobs and American Power Act (Ker-

ry Boxer). October 2009. http://pdf.wri.org/wri_summary_ceja-pa_2009-10-30.pdf

10 Larsen, John; Kelly, Alexia: Heilmayr, Robert. World Resourc-

es Institute. WRI Summary of HR 2454, the American CleanEnergy and Security Act (Waxman Markey). July 2009. http://

pdf.wri.org/wri_summary_of_aces_0731.pdf

11 Kelly, Alexia. World Resources Institute. Summary of Offset

Provisions in HR 2454, the American Clean Energy and Secu-rity Act. August, 2009 and Larsen et al. World Resources In-

stitute. WRI Summary of S. 1733, the Clean Energy, Jobs andAmerican Power Act (Kerry Boxer). October 2009. http://pdf.wri.

org/wri_summary_cejapa_2009-10-30.pdf

12 The term developing country means a country eligible to re-ceive ofcial development assistance according to the income

guidelines of the Development Assistance Committee of the Or-ganization for Economic Cooperation and Development.

11


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Kerry Boxer apply, 4) provides or appropriate disposition

o osets, and 5) ensures the oset project developer can re-

ceive disposition o legal service under U.S. law.13

Te requirements or international osets are similar in

Waxman Markey. International oset credits may be is-

sued only i: 1) the U.S. is a party to a bilateral or multilater-

al agreement that includes the country in which the project

has occurred, 2) such a country is a developing country,14

and, 3) the agreement ensures all requirements o legislationapply and provides or appropriate disposition o osets.15

The Role of Early OffsetsAll three bills--Kerry Boxer, Waxman Markey and Stabe-

now et al--include provisions to recognize existing regu-

latory or voluntary programs to issue early oset credits

whereby oset credits issued by existing programs that meet

certain criteria would be eligible or use in the U.S. compli-

ance system. Te criteria in Kerry Boxer and Waxman Mar-

key are almost identical and include provisions requiring el-

igible programs to:be a government-established or Administrator-approved1.

program established beore Jan. 1, 2009;

have developed methodologies through a public consul-2.

tation or peer-review process;

13 Larsen et al. World Resources Institute. WRI Summary of S.1733, the Clean Energy, Jobs and American Power Act (Ker-

ry Boxer). October 2009. http://pdf.wri.org/wri_summary_ceja-pa_2009-10-30.pdf

14 The term developing country means a country eligible to re-ceive ofcial development assistance according to the income

guidelines of the Development Assistance Committee of the Or-ganization for Economic Cooperation and Development.

15 Larsen, John; Kelly, Alexia: Heilmayr, Robert. World Resourc-es Institute. WRI Summary of HR 2454, the American Clean

Energy and Security Act (Waxman Markey). July 2009.

have publicly published standards that ensure emission3.

reductions are real, additional, veriable, and enorcea-

ble;

require that all credits issued are registered in a public-4.

ly accessible registry with individual serial numbers or

each ton; and,

ensure there is no confict o interest between the oset5.

project representative and the registry.

Retired and expired credits are not eligible and credits willonly be issued or emission reductions that occur aer Jan.

1, 2009, and only or three years aer the date o enact-

ment o the act. Projects must have started aer Jan. 1, 2001.

Projects that were not established by state or tribal law, or

were established aer Jan. 1, 2009 but otherwise meet all o

the other criteria can apply to US EPA or consideration or

early oset credit.16

Stabenow et al includes a dierent, though similar set o

provisions. It requires that: One oset credit be issued or

each ton o CO2e registered under an Administrator-ap-

proved regulatory or voluntary program established beoreJan. 1, 2009, as long as the program:

was started aer Jan. 1, 2009;1.

developed methodologies through a public consultation2.

or peer-review process;

made publicly available the standards, methodologies3.

and protocols o the program;


1733, the Clean Energy, Jobs and American Power Act (Ker-ry Boxer). October 2009. http://pdf.wri.org/wri_summary_ceja-

pa_2009-10-30.pdf and Larsen, John; Kelly, Alexia: Heilmayr,

Robert. World Resources Institute. WRI Summary of HR 2454,the American Clean Energy and Security Act (Waxman Mar-

key). July 2009.

12


Table 3. Eligible Offset Project Types in Legislative Proposals in 111th U.S. Congress

Bill US Approved Domestic US Approved Internati-onal Deforestation

UNFCCC ApprovedInternational (CDM)

US Approved Project-Level International

US Approved BilateralSectoral

HR2454 Yes, USDA to Adminis-ter includes per se

eligible list

Yes, EPA to administer,subject to certain

requirements

Yes, if EPA determinesof comparable quality

to US program


requirements


requirements

S1733 Yes, President to

administer no per se

eligible list

Yes, President to

administer, subject to

certain requirements

Yes, if EPA determines

of comparable quality

to US program

Only after certain

conditions have been

met (sustained highallowance prices or

sustained low offset

volume), EPA to admi-

nister

Yes, EPA to administer,

subject to certain

requirements

S 2729 Yes, USDA to adminis-

ter, per se eligible list

Yes, but only through

the early offsetcrediting program for

limited time

No (does not allow

international offsets)

No (does not allow


No (does not allow



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requires verication o all emission reductions by a state4.

regulatory body or accredited third party verier;

requires registration o all credits issued in a public-5.

ly accessible registry with individual serial numbers oreach ton; and,

ensures no credits are issued or projects that were6.

unded or solicited by the program administrator.

Te Administrator may revoke approval o a program i

the above criteria are not met, or can prohibit a particular

project type i it ails to ensure credits will only be issued or

emission reductions that are measurable, additional, veria-

ble, and enorceable. In addition, credits rom projects start-

ed afer 2001 and issued by qualied programs are eligible

or early oset crediting. Retired and expired credits are not

eligible. Stabenow et al also allows or provisional credit-

ing o international reduced deorestation projects provided

projects meet certain criteria.17

ConclusionWhile the exact details o U.S. emission trading legislation

are still unknown, the provisions discussed in this docu-

ment provide important insight into the likely ultimate de-

sign o a U.S. oset program. What is relatively certain is

that the U.S. will break new ground with the development

o domestic oset crediting programs and o ederally man-aged oset programs or both domestic and international

oset project types. Te decisions made in Waxman Markey

and through the legislative development process in 2010 are

likely to have a proound impact on global carbon markets

or many years to come.

17 Kelly, Alexia. World Resources institute. WRI Summary of S.

2729 Clean Energy Partnerships Act of 2009. December 2009.

WRIis an environmental think tank that goes beyond research to

fnd practical ways to protect the earth and improve peoples

lives. It provides and helps other institutions provide ob-

jective inormation and practical proposals or policy and

institutional change that will oster environmentally sound,

socially equitable development. WRI works around key pro-

grammatic goals in governance, climate protection, people

and ecosystems, and markets and enterprise.

13


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China has the largest annual greenhouse gases (GHGs) emis-

sions in the world. It has ully acknowledged the seriousness

o climate change and the impact to Chinas social and eco-

nomic development. As China tackles the reduction o GHGs

and adapts to climate change, it must do so while maintaining

rapid and sustainable economic growth [1]. Tis major chal-

lenge is unlikely to disappear in the coming one or two de-

cades we believe. In the past ew years, China developed a se-

ries o policies and conducted aggressive actions to tacklethis issue. Enabling national policy, including nancial incen-

tives, have continuously developed during the period. One o

the many eects has been the sharp growth in wind capacity

which in 2009 reached 16.1 GW (+92% y-o-y) out o a total o

874.1 GW (+10% y-o-y). Also China has become one o the

major renewable energy (RE) equipment manuacturers and

project developers o low carbon technologies in the world.

However, to realize industrialization and modernization

while maintaining its GHGs emissions levels under an ac-

ceptable level, China must still surmount a variety o chal-lenges, including or example:

(1) In Copenhagen, no legal-binding agreement was

achieved or post-Kyoto ramework yet. As such, project de-

velopers in China still ace high risk o the implementation

o Clean Development Mechanism (CDM) in the post-Kyo-

to period. Te Chinese government, we understand, is ac-

tively working on this issue, as well as the additionality issue

rom wind CDM project development.

(2) For solar projects, the Feed-in-aris (Fis) is a ma-

jor challenge. Te bidding price or the rst concession,

CNY1090/MWh (USD 159.69), is still 60% higher than the

coal-red power price. o acilitate the wide deployment outility-scale solar photovoltaic (PV) projects, the govern-

ment has to provide a large amount o subsidies or the proj-

ect will not be commercially viable.

(3) For Carbon Capture and Sequestration (CCS) projects,

the delay o CDM eligibility by the CDM Executive Board

may be a hurdle or technology transerred rom demon-

stration stage to deployment and even commercial stages.

(4) Te grid connection o RE is still a key issue in Chi-

na. Te government has to speed up the development o a

strong smart grid, as well as the RE development und, to

catch up with low carbon project development.

(5) At the current stage, there are a myriad o polysilicon

producers and wind turbine manuacturers in China. Te

government is studying plan to curb overcapacity. With

merger and acquisitions activities in these sectors, more low

carbon projects may be implemented with lower capital ex-

penditure in the coming years.

1. GHG Emissions and Energy Mix

Chinas annual CO2 emission will continue to increase giv-en its rapid economic growth [2] though its cumulative CO2

emission is still low and its per capita CO2

emission is only

a raction o those o developed countries. At the same time,

in terms o CO2

emissions per unit o GDP, Chinas emission

level is already higher than the global average, mainly due to

its energy mix and energy conversion efciency.

Fossil uels contribute to over 90% o Chinas primary ener-

gy mix and or electricity, coal-red power plants account-

ed or 83% o the total generation at the end o 2009 [3]. As

such, to reduce GHGs, China must urther optimize its en-

ergy mix, increase low carbon energy usage, and intensiyenergy efciency and conservation eorts.

14


04.

Key Policy and Financing Developments in Chinas Low

Carbon GenerationGiuseppe Jacobelli and Dr. Jian Liang, CLP Holdings Ltd.

Table 1: Chinas Key Indicators

Year

Indicator

2007 2020 2030

RS* 450* RS* 450*

Share of world population 20% 19% 18%

Share of world GDP 11% 18% 21%

Share of world CO2

emission 21% 28% 27% 29% 27%

Share of cumulative world CO2

emission 9% 13% 13% 16% 15%

*: RS means Reference Scenario. 450 means 450 Scenario, in which collective policy action is taken to

limit the long-term GHG concentration in the atmosphere to 450 ppm CO2-eq.

Source: World Energy Outlook 2009, IEA


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2. Policy MilestonesIn the past fve years or so, China issued a series o policies

and reports to mitigate GHGs emissions as well as creatingsome new agencies, such as the National Energy Adminis-

tration (NEA) in 2008 and the National Energy Commis-

sion (NEC) in January 2010. Te latter led by the Chinese

Premier or better coordination in ormulating energy strat-

egy and development planning.

15

Table 2: RE Policy Development in China

Time Policy Action

12. 1995 Electricity Power Law Encourage, support electricity generation rom RE and clean energy

11. 1997 Energy Conservation Law Stimulate domestic R&D in energy conservation technologies, improve industrial

energy efciency

7. 2003 The Program o Action or Sustainable Deve-

lopment in China in the Early 21st Century

Encourage improvement o energy mix and energy efciency

10. 2005 Measures or the Operation and Management

o Clean Development Mechanism Projects

Formulate measures and promote proper carrying out o CDM projects

1. 2006 RE Law Lay the oundation or RE development by setting economic incentives

3. 2006 11th Five-year Plan or National Economic andSocial Development (2006-2010)

Set energy consumption/GDP unit reduction by c. 20% in 2010 rom 2005 level

6. 2007 China National Plan or Coping with ClimateChange

Outline objectives, basic principles, key areas o actions, and policies and measuresto address climate change or period up to 2010

9. 2007 Medium-to-Long-Term Development Plan or RE Set RE development targets: 10% o energy consumpt ion by 2010, 15% by 2020

10. 2007 China Medium and Long Term Development

Planning or Nuclear Power (2005-2020)

Set nuclear power development targets: c. 40GW by 2020

10. 2007 Amended Energy Conservation Law Declare energy conservation as a national priority and set up specifc reporting

procedures

3. 2008 11th Five-year Plan or RE Development (2006-

2010)

Set detailed 2010 RE development targets

8. 2008 Circular Economy Promotion Law Faci li tate circular economy: raise resources utilization efciency, protect and

improve environment and realize sustainable development

10. 2008 Chinas Policies and Actions or Addressing

Climate Change

State policies and actions China had adopted or addressing climate change and its

progress

11. 2009 Chinas Policies and Actions or Addressing

Climate Change The Progress Report 2009

Further steps to include addressing o climate change whilst taking into account

Chinese social and economic development plans, and continue to: 1) cut GHG emis-sions / GDP unit by notable margin by 2020 rom the 2005 level; 2) develop RE and

nuclear so that non-ossil uels account or c. 15% o primary energy consumption

by 2020; 3) energetically increase the orestry carbon sequestration; 4) dynamically

develop green economy, actively develop low-carbon economy and circular econo-my, and develop and popularize environmentally-riendly technologies

12. 2009 Amended RE Law Mandate grid companies to purchase all electricity rom RE sources; requiregovernment to oer tax breaks, set up a new national RE development und and

issue preerential loans to encourage growth o RE

Source: National Development and Reorm Commission, and et al. www.ndrc.gov.cn

Figure 1: Chinas electric energy production (2009)

Wind, 0.75%Nuclear, 1.95%

Hydro, 14.26%

Coal, 83.04%

Source: China Electricity Council, www.cec.org.cn


23/166

In addition to the above enabling policies, China set ambi-

tious mid-to-long-term targets to reduce CO2

emission, im-

prove energy efciency and stimulate RE development. Chi-

na is planning to revise probably upwards its RE targetsas part o its CNY 4 tri. (c. USD 586 mn [4]) stimulus pack-

age announced in November 2008 and revised in March

2009.

We believe urther policies and higher targets will be re-

leased as part o the Twelh Five-Year Plan (2011-2015).

Energy will be one o the key areas with possibly six ocuses

in the plan: energy mix optimization; development o en-

ergy bases; energy technology innovation; energy macro-

control; reorm o energy systems; and establishment o sus-

tainable energy policy standard.

3. Financing Tools for Low CarbonGeneration Projects

3.1. Implementation StatusChina mainly ocuses on ve low carbon generation sectors:

hydro, nuclear, wind, solar and biomass. China also strong-

ly supports the clean coal technology development, such as

coal gasication and CCS given the current predominance

o coal red generation.

In the past our years, the annual growth rates o hydro, nu-

clear and biomass power have been lower than wind pow-

er and solar PV. Even during the peak o the global nan-

cial crisis in 2008, wind and solar installations maintained a

high rate o growth thanks to:

enabling government policies and targets or wind and1.

solar development;

deployment o large-scale wind and solar arms allowed2.

thanks to the increasing commercial viability o some

technologies;

signicant investments rom venture capital and private3.

equity rms;

reduction in investment costs or wind and solar projects4.

thanks to technology transer, localized production o

wind and solar components and lower costs o some raw

materials like silicon;

support rom carbon credits revenues thanks to the5.

CDM and special nancial incentive provided by central

and local governments, such as tax holidays or so loans.

16


Table 3: Chinas Mid-to-Long-Term Targets in MitigatingClimate Change

Item 2005 Actual 2010 Target 2020 Target

CO2

Emission Reduction

per unit of GDP from

the 2005 level

40% - 45%

Energy consumption

reduction per unit of

GDP from the 2005 level

20%

RE contribution in total

energy consumption

7% 10% 15%

Hydro (GW) 117.0 190.0 300.0

Nuclear (GW) 7.0 12.0 70.0 (40)

Wind (GW) 1.3 10.0 100.0 (30)

Solar PV (GW) 0.1 0.3 20.0 (1.8)

Biomass Power (GW) 2.0 5.5 30.0 (n.a.)

Note: The 70 GW nuclear, 100 GW wind and 20GW solar PV targets are

being discussed by Chinese policy makers

Source: National Development and Reform Commission, and the docu-

ments listed in Table 2

Figure 2: The combination of low carbon generation capacityin 2005 and 2020 (targets)

Biomass

Power, 5.77%

Solar PV, 3.85%

Wind, 19.23%

Hydro, 91.89%

Hydro, 57.69%

Biomass

Power, 1.57%

Solar PV, 0.05%

Wind, 1.02%

Nuclear, 5.46%

Nuclear, 13.46%

Source:National Development and Reform Commission, and the documents listed in Table 2


24/166


17

Source: National Development and Reform Commission,

and the documents listed in Table 2

1

0.5

0

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5%

0%

Inst

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An

2005 2006 2007 2008

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200

180

160

140

120

100

80

60

40

20

0

20%

18%

16%

14%

12%

10%

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4%

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ieta ghg 2010 report final

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