Recent proposals to the emerging US cap-and-trade draft legislation suggest that the Senate intends to keep domestic forestry and agriculture offsets as a major component of the climate bill. Senator Debbie Stabenow led the release of a bill that would create a domestic offset program within the federal cap-and-trade legislation. The bill provides some clarity on eligible project types and the use of temporary credits as a mechanism to balance land-use flexibility with offset permanence. On international offsets, there is still great uncertainty for project-based REDD, although language in the Stabenow amendment suggests that some REDD activities could be eligible for early action credits.
Originally aiming for a Senate vote before the UN climate conference in Copenhagen in December, which would set the stage for passing the bill into law, the majority-party Democrats now concede that this timeline is impossible. They now aim to pass legislation in early 2010, and the first movement in this direction was the Environment and Public Works committee passing the “Clean Energy Jobs and American Power Act” (known as the Kerry-Boxer bill) out of committee last week. Five additional committees involved in the mark-up process now need to propose amendments or alternative bills before debate on the Senate floor.
In trying to follow the committee mark-up processes and Senate procedures, it can be easy to lose track of what is really at stake on the ground. And on the ground means just that: Forestry and agriculture projects are expected to provide the majority of the credits allowed under the bill’s offset provisions, which allow for a whopping two billion offsets per annum. The entire global carbon market traded just 450 million tonnes of project-based credits in primary markets in 2008. This begs the question of just how all these offsets will be supplied and what rules are likely to be set around the key issues of eligibility, additionality and – always a challenge – permanence.
The Waxman-Markey bill passed by the lower house of Congress, the House of Representatives, in June 2009 stipulated that regulated entities could meet a specified percentage of compliance obligations with offsets (approximately 30 per cent in 2013 rising to 60 per cent in 2050), totaling two billion tonnes per annum. In aggregate, half of those could be supplied by domestic sources and half internationally. The Kerry-Boxer bill raised the limit on domestic offsets to 1.5 billion tonnes, decreasing the international limit to 500,000 tonnes. The Congressional Budget Office estimates that demand for offsets in the early years will be well below this – approximately 420 million tonnes per annum increasing to 640 million tonnes by 2020 – but still hundreds of millions of tonnes larger than current voluntary and pre-compliance trading in primary markets.
Senator Stabenow’s bill shares responsibilities for drafting regulations and administering the offset program between the US Department of Agriculture (USDA) and the Environment Protection Agency (EPA). The legislation requires offset regulations to be drafted within one year of the bill becoming law and specifies the mandatory inclusion of over 30 project types, including forest management, reforestation, conservation, tillage practices and livestock management. Offset project regulations must meet the now familiar criteria of ensuring that offsets are verifiable, additional and permanent and must specify baseline, additionality and leakage quantification methodologies. It’s a tall order, and the USDA and EPA will form a 9-member advisory panel to advise on regulatory development.
An often contentious issue with land-based offsets is permanence. While early discussions in the House seemed to imply the possible use of short-term credits akin to tCERs in the CDM, the Stabenow bill seeks mechanisms to ensure land use flexibility while maintaining offset permanence. This includes possibly bundling short-term contracts sequentially to equal a permanent credit, an idea that is already raising questions around enforceability and climate benefit. The permanence debate is far from resolved.
Early action is another critical element. The Stabenow bill requires the offset scheme administrator to issue compliance offsets for post-2009 credits issued under standards that meet certain criteria. Administrators of various standards, such as the California Climate Action Reserve protocols, the American Carbon Registry and the Voluntary Carbon Standard (VCS), can apply to the offset scheme administrator for approval as a qualified early offset program. New Forests is already seeing an increase in demand for Climate Action Reserve credits based on early action provisions.
On the international side, the main source of offsets is expected to be REDD credits. International offsets will be regulated by EPA, in consultation with the Department of State and US Agency for International Development (USAID), and the agency has two years to issue regulations once the bill passes into law.
The REDD provisions in the Kerry-Boxer legislation are as complex as the conversations occurring internationally, ranging from distinctions between “major” and “minor” emitting countries, national-level baselines, state and provincial crediting, project activities and crediting periods. Basically, the legislation leans towards compensating national-level activities (measured against national deforestation baselines) in “major” emitting countries – those that contribute more than 3 per cent of global greenhouse gas emissions from the LULUCF sector and more than 1 per cent of total global emissions. These include the key countries of Brazil and Indonesia, where dozens of projects are already underway, in part, hoping to find a route to the US market. Project-level crediting may only occur in minor emitting countries and only for a period of 5-8 years.
The original Kerry-Boxer bill had no explicit early action provisions for REDD. Stabenow offers an amendment, indicating that early REDD crediting will be allowed for projects in registries that have been approved by the administrator, per the criteria for domestic early action and some other stipulations. This language is likely to be debated and could change form, but it would introduce some certainty for projects in both major and minor emitting countries in the early years of the US market.
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.