US: Offset holders doubt investigation decision before compliance deadline

Offset developers and holders are doubting the Air Resources Board (ARB) will make a decision about the 4.4m offsets under review before the first compliance deadline in November, potentially creating some small demand for carbon allowances.

The ARB, the cap-and-trade regulator, is looking into whether 4.4m credits from the ozone-depleting substance (ODS) protocol should be invalidated because they were generated at a facility not in compliance with a federal environmental law ( see EDCM 29 May 2014 ). ARB requires regulatory compliance for all offset projects.

An ARB spokesman said the California regulator has not started its final 30-day period and would not discuss the timing of a decision. If the ARB takes the full 30 days, a decision could come in late October, or within days of the first partial compliance deadline.

Compliance entities will be required to surrender 30% of their 2013 emissions on 3 November. Those emissions can be covered entirely by allowances or through a mixture of offsets and allowances.

However, the ARB appears to have the flexibility to use as little or as much of the 30-day period as it wants, developers noted. Because of that, the ARB could start the 30-day period and make a decision well in advance of the first compliance deadline.

Despite that flexibility, a trader at a compliance entity said he doubts a decision would be made before the first compliance deadline. He said compliance entities will likely use more allowances to meet their first compliance obligation because of the uncertainty with offsets.

“I think we all underestimated the likelihood of invalidation,” the trader said.

Market participants said a decision in late October would also handcuff compliance entities, because in the event of an invalidation, offset holders may not have enough time to exercise their contractual rights or purchase additional allowances to meet their compliance obligations.

Traders said any delay in the process could bring some additional demand for allowances from offset holders, developers or third parties, but the demand would not be enough to signficiantly change prices.

A broker said compliance entities would not have enough time to switch strategies if the decision came close to the deadline, and the most likely scenario is more allowances surrendered for compliance.

Developers still hopeful a decision will come soon

ODS offset developers said they are still hopeful the ARB will make a decision quickly and not take the full 30 days to determine whether the credits should be invalidated.

“From my understanding of the facts and the time already spent on the investigation, I would think the decision is clear cut,” a developer said.

Another offset developer said the ARB would have to make a quick decision to ensure those credits could be used for the first compliance deadline. But the developer said the first deadline would not be significant because of the ability to bank offsets for the first full compliance period in November 2015.

“The ability to use the 8% allocation for this period is not lost if [they are] not surrendered this November,” he said.

Developers largely believe the ARB should not invalidate any credits, because the regulatory compliance did not pertain directly to the offset generation. ARB offset rules specifically mention the regulatory compliance must be directly related to the offset generation, but invalidation rules are less specific.

The ARB has not discussed how it reads the rule or what parameters it could use to determine whether the credits should be invalidated. Dan X. McGraw