US: Developers likely to wait until 2015 to discuss amending regulatory compliance issue

Offset developers are not speaking with the Air Resources Board (ARB) about regulatory compliance requirements, but an environmental lawyer said the process could begin in earnest in 2015.

The ARB, the cap-and-trade regulator, opted to invalidate nearly 89,000 offsets on 14 November after a five-month investigation into a regulatory compliance violation at an Arkansas ozone-depleting substance (ODS) destruction facility (see EDCM 14 November 2014). The California regulator had been examining 4.4m ODS credits during the review.

Developers repeatedly voiced concern about the broad wording of the regulatory compliance requirement that may allow ancillary violations to invalidate credits and the process the California regulator used to investigate the issue. Market participants said they planned to speak with the ARB after the investigation was concluded.

Three parties involved in the offset investigation have not spoken with the ARB since the final decision was issued on 14 November. All three have communicated to the ARB through formal comments to amendments to the cap-and-trade regulation and the ODS protocol, which did not settle either issue. No party or group had spoken directly to the ARB about the issues, offset sources said.

J.P. Brisson, an environmental lawyer with Latham & Watkins, said the US holidays have limited the chances to speak with ARB officials, but discussions would eventually happen.

“I assume it will be part of the working plan for 2015,” Brisson said via email. “It will likely be a long process to go from discussions to actual amendments.”

Brisson, who has been vocal about the issue, said the process could take a year to complete. Brisson had called for ARB and stakeholders to sit down and discuss the issue. The International Emissions Trading Association, which represents people inside the market, also sent a strongly worded letter to the ARB about both issues.

Market participants are particularly concerned about the ARB’s investigation process that seemed to deviate from the process defined in the regulation. Specifically, participants were surprised the ARB had an indefinite amount of time to investigate the issue rather than a set timeline. The regulation allows for a 25-day period and a 30-day period, but those timelines do not run consecutively.

The additional time caused the offset market to slump and likely prevented some entities from surrendering offsets during the first compliance deadline in early November. However, developers are optimistic that future investigations will be more streamlined.

Developers, including those not impacted by the review, believe the most urgent change needed is a tailoring of the regulatory compliance requirement to ensure future projects or credits are not invalidated because of secondary violations. The ARB added some language to this section during the most recent amendments, but developers would like further clarification.

Offset sources are concerned that if the ARB does not tailor the rule that future projects could be impacted by a secondary regulatory compliance violation that is not related to the offset project. Those concerns are also making some offset developers question their position in the market. Dan X. McGraw