US: CCO3 supply will continue to rise in 2015, developers say

Author: Dan X. Mcgraw

2015/03/25

The supply of California carbon offsets (CCO) with an invalidation period of three years should continue to rise this year as demand builds in the secondary market, developers and offset sources told ICIS.

The Air Resources Board (ARB), the cap-and-trade regulator, allows companies to cover up to 8% of their compliance obligations with offset credits. Those credits can be invalidated up to eight years after being issued by the ARB.

The developer can reduce the invalidation period to three years, creating a so-called CCO3, if a second verification is done by another company. The developer can also sell golden CCOs that insure the credit against invalidation with either an allowance or another offset.

CCO3s, which are valued in the $9.75-10.15/tCO2e range Wednesday, are being issued more steadily this year than in 2014. According to offset data, 911,212 CCO3s have been issued by the ARB since April 2014, the date of the first CCO3 issuance. Nearly all – 830,600 – credits have been issued during four issuance dates in 2015. The ARB issued the remaining 80,612 CCO3 credits in April 2014.

“It is safe to assume that the trend will continue because of demand, but there is no guarantee or way to know what the pace will be,” an ozone-depleting substance (ODS) developer said. “Buyers demand is what is driving CCO3 conversions.”

All of the CCO3s have been issued by California’s ARB. Quebec, which joined California in 2014, has not issued any credits through its offset programme.

Buyer demand behind conversion

Developers said the recent increase in CCO3 issuances should continue in 2015 and beyond as compliance entities shift their focus to credits that mitigate invalidation risk.

A developer said as much as 50% of the offsets produced in California’s programme could be converted into CCO3s because of concerns about invalidation risk. Another developer added his company would convert most of its ODS projects into CCO3 because of the rising demand for credits with a reduced invalidation period.

Gary Geo, the president of the offset registry Climate Action Reserve, said it is difficult to predict exactly how many CCO3 will get produced from California’s programme, but the amount will likely rise as demand does.

“It will be the long-term approach as buyers are looking for CCO3s,” he said.

CCO3s are expected from all protocols. Two forestry developers are awaiting the first CCO3s from that protocol.

Compliance entities have shifted their interest from standard offsets to CCO3s and golden offsets over the past few months because of concerns about invalidation. CCO3s are usually sold at a $0.30/tCO2e premium over CCO8s.

The shift is largely the result of a six-month investigation by the ARB into 4.4m ODS credits. The ARB eventually determined nearly 89,000 offsets credits should be invalidated because of regulatory compliance issues ( see EDCM 14 November 2014).

Fuel suppliers, who joined the programme in January, are seen as the biggest buyers of offsets, because those entities have a large enough compliance obligation to make the product financially attractive. Market participants said their inclusion into the programme has helped to increase demand. Dan X. McGraw