US: Offset use in RGGI and California could be impacted by EPA rules

Cap-and-trade market participants are unsure how the Environmental Protection Agency’s (EPA) proposed emission rules for existing power plants could impact the use of carbon offsets in the two US carbon schemes.

The Regional Greenhouse Gas Initiative (RGGI), the US’ first cap-and-trade programme, and California’s carbon scheme both allow offsets to be used by entities to meet their compliance obligation up to a certain percentage. By doing so, compliance entities can exceed the cap, or the total CO2 allowed to be emitted in a given period.

The EPA’s proposed rules require overall emissions from the power sector to be reduced by 30% nation-wide from 2005 levels by 2030 ( see EDCM 2 June 2014 ). States have a specific goal to meet, but out-of-sector offset credits could not be used for compliance by power companies, according to the plan.

“Emission reductions from offsets would not be counted when evaluating CO2 emission performance of affected electric generating units (EGUs), because those reductions would not come from those affected EGUs,” the EPA wrote in a technical document.

Another section, however, said offsets could be used “provided those emission limits would achieve the required level of emission performance for affected EGUs.”

The language has left some uncertainty in the market about the use of offsets.

RGGI and California officials said they are still evaluating the proposed rules and considering the potential role for offsets inside of that context.

“It is far too early for that level of detail,” a spokesman for California cap-and-trade regulator Air Resources Board (ARB) said.

Doubts linger in the market

Carbon Market Compliance Association executive director Andre Templeman, which is also a principal at consultancy Alpha Inception, said during a conference call on Wednesday that he believes only offsets generated by reducing emissions from power generation could be used for compliance under the proposed rules.

Templeman said the power sector would not be able to use out-of-sector offsets, such as forestry or ozone-depleting substance credits, because they would allow those units to exceed their emission targets without reducing greenhouse gases.

Richard Saines, an attorney at law firm Baker & McKenzie, said offsets could still fit into a state’s plan to cut emissions from existing power plants, but “above and beyond the [EPA] targets.”

“You need something else that’ll make up the difference. Offsets don’t count for the EGUs’ compliance obligation.”

A trader from a California utility said participants are waiting to see whether offsets might be impacted by the EPA’s proposed plan, noting the potential that offsets could be pulled from the programme.

“It is harder to show equivalency [with the credits],” the trader said. “That’s one of the areas that states like California are going to have to sort out with the EPA.”

A different trader said the decision could come down to politics.

Offsets have been used sparingly in California’s cap-and-trade programme, mainly due to the relatively low savings associated with the credits. California offsets are selling in the $8.00-10.00/tonne of CO2 equivalent based on their risk profile, which is considered a too-low discount to allowances to make them attractive.

RGGI’s programme relies less on offsets to meet its targets. Compliance entities can use offsets to meet 3.3% of their emissions targets while California entities can offset 8% of their annual emissions. Dan X. McGraw