The beginning of 2012 marked the start of the California cap-and-trade programme, one of the most anticipated and discussed carbon offsetting schemes at present. And while the programme has the potential to become the second largest market for carbon credits in the world after the EU Emissions Trading System (EU ETS) on account of its rigid emission reduction targets, it has been facing different challenges of late, the most recent being a plea to the Californian Air Resources Board (ARB) to boost the supply of offset projects so as to avoid projected rise in compliance costs.
Considering that the United States never ratified the Kyoto Protocol and that the Regional Greenhouse Gas Initiative (RGGI), a collaboration effort of nine north-eastern states, has not had much success so far, high hopes are pinned on this regional cap-and-trade system to improve the overall environmental image of the United States. The California ETS covers some major greenhouse gas emitters, such as power plants, refineries and transportation fuel suppliers. As noted on the ARB website, the initial target is reducing greenhouse gas emissions to 1990 levels by 2020 and a more ambitious long-term goal of achieving an 80 reduction by the year 2050, relative to 1990 levels.
And while the design of the California ETS has been highly praised, it is also one of the main reasons for the different challenges which the cap-and-trade programme is currently facing. On 4 April 2012, Ecosystem Marketplace reported that two plaintiffs wanted to repeal one of the main ARB offset provisions, namely the performance-based offsetting approach for the generation of carbon credits. Ecosystem Marketplace notes that this approach requires one protocol for all projects of a certain type, rather than individual protocols for unique project scenarios, as is the case with the Kyoto Protocol’s Clean Development Mechanism (CDM). The performance-based approach was introduced by the voluntary carbon market and according to the Ecosystem Marketplace’s report “Bringing it Home: Taking Stock of Government Engagement with the Voluntary Carbon Market”, compliance regimes around the world are turning to such performance-based approaches so as to make their offsetting programmes more practicable.
So far, the California ARB has adopted four compliance offset protocols, which may be used for the generation of ARB carbon credits. Those protocols include forestry and urban forestry, destruction of ozone-depleting substances and livestock manure digesters, with a view of adding agricultural waste and landscapes to this offsetting protocol catalogue in the future. And yet, those protocols might not be sufficient to ensure the necessary supply of carbon offsets. On 13 April 2012, Bloomberg BNA reported that carbon traders and regulated entities were concerned about a potential shortage of carbon offsets, which in turn would increase the cost of compliance instruments. On the other hand, boosting the supply of carbon offset project should also be done with caution, so as to avoid an oversupply of carbon credits, which is one of the most serious issues that the EU ETS – the world’s most advanced cap-and-trade mechanism – is currently facing.
It is still too early to say how the ARB will respond to those supply concerns as well as to predict the outcome of the potential legal threats to the California ETS. And yet, the results will have important consequences not only in relation to the cap-and-trade programme itself, but also on a broader scale. Currently, there are ongoing discussions about the linkage of the California and Quebec cap-and trade systems with the purpose of creating a bigger carbon credit market, as the legal challenges could potentially slow this process down. In addition, the Californian carbon offsetting experience may turn out to be crucial for the establishing of a future nation-wide carbon market in the US. Bloomberg BNA quotes the California ARB Chairwoman Mary D. Nichols, who suggested at a recent conference that depending on the outcome of the November elections, there could be renewed interest in a national trading programme.
The concerns about the shortage of carbon credits, together with the recent legal challenges for the California ETS are a reminder that having a functioning cap-and-trade system in place comes at a price. It remains to be seen whether the future environmental benefits for the state of California achieved through the programme will justify the costs.