[Updated 24/7/09: Revised assessment of early action credits]


The US cap and trade bill currently stands to deliver a huge stimulus to the clean energy and forest carbon sectors in North America and in the developing world. Whatever final form the scheme takes, it will produce the world’s biggest single carbon market from 2012, eclipsing the EU ETS. And it’s already clear generous international carbon offset provisions and linkages with other national emissions trading schemes will ensure the carbon market spreads well beyond US borders. This is particularly so for the emerging avoided deforestation, or REDD, sector.

The American Clean Energy and Security Act, the Waxman-Markey bill, has passed through the US House of Representatives. It must yet clear its biggest hurdle, the Senate, to become law and if it were to do so more changes appear inevitable. But crucial to the bill’s successful progress thus far has been the extensive access to offsets – domestic and international - it offers to US companies to meet their emissions reduction obligations under the scheme. The extended role of offsets looks set to stay. Carbon offsets are emissions reductions generated outside the covered sectors of an emissions trading scheme.

Ability to buy offsets to help meet a reduction target is often cheaper for companies than reducing emissions in their own operations. The US Environmental Protection Agency has estimated that the carbon price in the proposed US scheme could be up to 90 per cent higher if it didn't allow emitters the option of buying large volumes of offsets from overseas. 

As it currently stands, the US bill allows for a massive two billion tonnes of offsets to be bought every year for compliance with scheme targets – one billion sourced domestically, and one billion internationally. The international limit could rise to 1.5 billion if not enough domestic offsets can be generated, a highly likely scenario in the early years. Up to the end of 2016, international offsets (and emission permits from other regulated schemes like the EU ETS) would count for compliance on a 1:1 basis with US permits. But from 2017, foreign credits would only count at a rate of 5:4.

To put the US offsets limits in perspective, total US greenhouse emissions are just over 7 billion tonnes a year. And the leading offset scheme up to now, the UN’s Clean Development Mechanism (CDM), is only likely to produce 1.5 billion tonnes of reductions in total from the mid-2000s to 2012. Market analysts Point Carbon have initially estimated that there are unlikely to be more than 25 million tonnes of offsets that can be generated within the US in year one of the scheme, 2012.

The large volume of potential offsets has environmentalists worried that it allows US emitters to shirk responsibility to cut their own emissions. There is also concern that offsets generated in developing countries might not be subject to the scrutiny needed to ensure their emissions reductions are real, although the bill so far embraces the use of widely-accepted project standards and independent verification.  

While farm-state Congress members won a transfer of domestic offsets responsibility from the EPA to the US Department of Agriculture, this change does not apply to international offsets. Responsibility for the integrity of these offsets, set to be dominated by REDD credits, will remain with the EPA.

A major benefit of such large offsets provisions would be its contribution to building a global carbon market where the advantage of worldwide scale allows emissions to be cut more cheaply. Thus, there is big scope for carbon project developers in the US and worldwide to produce emissions reduction activities to earn carbon credits to standards that will be acceptable under the regulations of the US scheme.

A clear intention by US legislators is to create a carbon market in tropical forest preservation – seen now by many as the best way to halt deforestation that is responsible for up to 20 per cent of worldwide greenhouse emissions.

Projects to avoid deforestation in vulnerable areas of forest in developing countries would earn offset credits recognised in the US. The intention in the bill is to have the US government approve host countries for participation for REDD offsets based on their implementation of a national forestry plan. These could take years to establish but in the interim there appears to be support for recognising projects before the host country formulates its own plan, said Lenny Hochschild, head of the Greenhouse Gas Americas group at the broker Evolution Markets. “This would act as a bridge between where we are now and where we might be in the next ten years,” he said. “It’s a fluid area of the bill, the ideas are not fully fleshed out and could well change in Senate.”

So far, offsets validated and verified to the rules and methodologies of existing US state regulations – California’s Climate Action Reserve (CAR) and the North-East’s RGGI scheme – are eligible.
 
Voluntary market offset standards were initially excluded from the bill but the Voluntary Carbon Standard (VCS) appears to have been successful in lobbying for inclusion. The VCS now has the opportunity to apply as an eligible standard and it looks like they will be accepted, says Hochschild. Whether other standards, like those of the American Carbon Registry, will be looked on favourably is less certain.

The Waxman-Markey bill also recognises offsets and US state-based emissions allowances generated before the scheme comes into effect in 2012. Anticipation of “early action” recognition has already seen investors speculating in US offsets coming from current projects and the allowances issued under the north-eastern states’ RGGI trading scheme.

This is also a fluid area of the bill with some ambiguity over just where the rules stand currently. It appears now that earlier generous treatment of these credits and allowances issued between 2009 and 2011 has been watered down and they will be valued under a federal scheme based on their average trading value in the year of issue. This could be significantly less than the prevailing US carbon price. Assuming it does eventually pass, the full picture on early action credits and a number of other aspects of the bill will not be clear until final shaping in the Senate.


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