June 9, 2022 by Ujjwal Gupta
Compliance offsets are tradable credits that represent verified GHG emissions reductions or removal enhancements from sources not subject to a compliance obligation in the Cap-and-Trade Program. The Washington Cap and Trade program is scheduled to launch in early 2023 and overall emissions cap is set to be around 63M tons. The program will be run under the WCI framework, the same framework used by California and Quebec. Most of the program is consistent with the California-Quebec framework, though it initiates an entirely new approach to offsets usage.
In the California Compliance offsets market, the Offsets usage limit varies for different compliance periods. In CP3 (2018-2020), the offsets usage limit was 8%, for CP4 (2021-2023) the offsets usage limit is 4%. Offsets used in a particular year in place of allowances are not deducted from the next year’s emissions cap.
E.g. In 2020, the emissions cap in California was 332M tons, on average entities surrendered 6.91% of their obligation as offsets i.e around 23M tons offsets in 2020. This figure has no bearing on the next year’s emissions cap (2021), as offsets surrendered in the previous year are not deducted from the emissions cap. Instead the cap continues to decline each year unaffected at approximately 5%, in this case the use of offsets increases the bank of allowances available for compliance in future years. 2030 emissions target for California is 200M tons, a 40% decline from 2020 levels. In the figure below, if we consider maximum offsets usage for compliance in CP4 (4%), CP5 (4% for the first two years and 6% for the last year) and CP6 (6%). Because of the program design, the bank of allowances are depleted slower as offsets are surrendered instead or the effective cap of emissions is set to increase by 6.3% to 212M tons in 2030. (There is a slight kink for the year 2021 in the chart below which signifies the decline in the offsets usage to 4% from 8%). the bank of allowances are depleted slower as offsets are surrendered instead.
In Figure 2, the blue Line represents the maximum possible cumulative emissions for California in a maximum offsets usage case. The total emissions in this case exceed the legislated emissions cap (represented by yellow area) by 4% in the year 2030 as in the WCI California Compliance offsets program offsets are counted in addition to the established cap.
The Washington offset program aims to bring all emissions under a fixed cap, irrespective of offsets use. Hence, whenever an offset is used for compliance purposes, the same number of allowances are retired from the allowance pool in the following year. This step makes sure that offsets do not enable emitters to emit more than the state’s cap, by using offsets as means to expand the cap
The offset usage limit is 5% for the first compliance period (2023-2026) (4% in California), and then 4% in the second compliance period (2027-2030) (6% in California).
In the Washington Cap and Trade program, the number of allowances available for auction is :
Auction = Budget – Free allocation – APCR – VRE – Offsets used for compliance
APCR = Allowance Price Containment Reserve
ECR = Emissions Containment Reserve
VRE = Voluntary Renewable Electricity Reserve
The purpose of Allowance Price Containment Reserve is to contain unanticipated high compliance costs for covered and opt-in entities by keeping allowance prices from getting too high. If the settlement price is very high in auction, Ecology will auction some of the allowances from the APCR.
Renewable electricity that is directly delivered to Washington whose generation approach is consistent with WCI design and California requires establishment of a Voluntary Renewable Energy Reserve. Retirement of allowances to recognize green power programs (VRE) is necessary because VRE doesn’t reduce emissions. The cap does. Ecology allocates 1/3 of one percent of allowances for VRE.
The Department of Ecology will use the following process to remove and retire allowances to account for the use of offset credits used for compliance. In Figure 3, the dotted blue line represents the actual allowances supply which will be below the emissions cap due to the offsets adjustments in the Washington Cap and Trade program. The gap between the emissions cap and allowances supply widens as the offsets surrendered approaches its maximum limit. Allowances budget will further shrink if we factor in the offsets coming from tribal lands (3% through 2026 and 2% from 2027 onwards) and used for compliance by the obligated parties.
An ecology offset credit must result from the use of one of the following compliance offset protocols: Only projects located in the United States and its territories are eligible under these protocols. Every reference to ARB is amended to ecology.
(a) The California Air Resources Board, Compliance Offset Protocol Livestock Projects, October 20, 2011, and Compliance Offset Proto-col Livestock Projects, November 14, 2014, are adopted.
(b) The California Air Resources Board, Compliance Offset Protocol Ozone Depleting Substances Projects, October 20, 2011, and Compliance Offset Protocol Ozone Depleting Substances, November 14, 2014, are adopted. For ODS destruction to be eligible as an offset project under this protocol, all ODS must be sourced from stocks in the United States or its territories and destroyed within the United States or its territories.
(c) The California Air Resources Board, Compliance Offset Protocol U.S. Forest Projects, October 20, 2011, Compliance Offset Protocol U.S. Forest Projects, November 14, 2014, and Compliance Offset Protocol U.S. Forest Projects, June 25, 2015, are adopted.
(d) The California Air Resources Board, Compliance Offset Protocol Urban Forest Projects October 20, 2011, is adopted.
In essence, Washington copied ARB’s homework on offset protocols, but chose a radically different approach when it came to compliance using offsets. See our upcoming article for further analysis on how this may come to play out.
Check out another article on “Washington Cap-and-trade: Description and differences from California” for more insights on Washington.