by Marisa MeizlishThe possibility of a 2010 climate bill in the United States is looking bleak but, ironically, the delay may emerge as a saving grace for climate legislation. Senate Democrats and Republicans are at an impasse on current versions of the proposed bill. However, according to analysts and industry insiders speaking at the first major post-Copenhagen
energy and environment conference this week, a lack of enthusiasm for addressing emission reductions through the stick of EPA regulation may flip the negotiation dynamics in a positive direction.
The December endangerment finding that requires the EPA to regulate greenhouse gases has infuriated many Republicans and businesses, who see it as an inefficient and costly way to regulate emissions. If Republicans win seats in November mid-term elections, as expected, the pressure will be on the party to offer an alternative to EPA regulation. Then bipartisan progress on a climate bill can begin earnest. Even with a smaller majority, the Democrats will control the legislative agenda and calendar, so a climate bill is unlikely to drift into legislative history – but a bill that can win bipartisan support with a more Republican Congress may be quite different than what was being discussed in 2009.
There is a hope that the climate bill currently being developed by Senators Kerry, Boxer and Graham is being drafted in the spirit of these dynamics and can garner the required 60 votes to avoid a filibuster. While their bill is expected “in the spring,” conference participants were reporting a general expectation of a delayed cap-and-trade program start to 2014 or 2015. Other changes could include dropping the cap-and-trade component in order to focus on an expansive energy program or capping only the utility sector in the first year and bringing other sectors in over time.
Amidst the varying predictions, opinions and expectations, there did appear to be some emerging consensus around two hard-to-dispute facts: the cost of reducing the United State’s emissions in a meaningful way considerably rises without the use of an offset market, and the potential current supply of offsets at the start of a scheme is woefully below expected demand.
The current proposed US climate bills are fundamentally centered around the liberal use of offsets. The Kerry-Boxer bill, for example, proposes a limit of 2 billion tCO2 offsets per year, which represents about 30 per cent of the cap in 2012 and rising as the cap decreases. By comparison, Europe’s trading scheme allows regulated entities to meet about 10 per cent of their compliance obligations with offsets. Estimates are that the total demand for offsets across all eight years of the EU ETS Phase III (2013-2020) will be approximately 1-2 billion tCO2. Offsets are supplied by CERs generated from the Clean Development Mechanism (CDM), and forestry offsets are not permitted. In California, regulations are expected to limit the use of offsets to 4 per cent of compliance obligations, representing about 8 million tCO2 in 2012.
Reports presented at the conference by EPRI, Point Carbon and others suggest the potential supply of offsets will be far below the expected demand, which the Congressional Budget Office puts at about 410 million tons in 2012, from domestic and international supplies. Other sources generally predict a range of about 300-400 million tCO2 demand. California’s Climate Action Reserve, a program expected to be a leading source of early-action credits eligible in the US compliance market, has issued 2.5 million tons as of January 2010. Approximately 32 million tons accredited to other programs that may receive early offset status (including the Voluntary Carbon Standard and the Chicago Climate Exchange) were traded in the primary voluntary market in 2008.
This leaves a gap of hundreds of millions of tons. The de facto expectation is that forestry offsets, both domestic and international, will supply most of this demand in the future. This is certainly the hope of policy makers drafting the US bills, which place a huge reliance on credits generated from reducing emissions from deforestation and degradation (REDD) in the developing world. Domestically, bills list more than 30 project types for offset generation with a focus on forestry, land and agricultural management. But there are many unanswered questions regarding REDD credits: Projects or national level accounting? Public or private finance? Historical or project baselines? VCS or other methodologies? Buyers considering early market investment options are often left spending more time on policy analysis than on project due diligence.
If a climate bill including a cap-and-trade program passes in the next year or two, early offset market participants could benefit from a price spike due to this potential supply-demand imbalance. Conversely, they could be left with stranded assets if markets do not materialize or do so too late for early projects to switch to compliance accreditation requirements.
Marisa Meizlish is Director of New Forests Advisory Inc, which invests in timberland and associated eco products, such as carbon, biodiversity and water, for institutional and private equity clients.
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