The Value of Offsets in Oregon’s Load-Based Cap and Trade System

1. The Value of Offsets in Oregon’s Load-Based Cap and Trade System Carbon Allocation Task Force Presented by: Michael Ashford June 1, 2006

2. Agenda • Background on The Climate Trust • Rationale for Offsets • Policy • Economic • Offsets are an Established Policy Option • Importance of Offset Quality • Offsets Support the Oregon GHG Strategy’s Guiding Principles 2

3. Background on The Climate Trust

4. The Climate Trust Mission: OffsetsThe Trust is a 501(c)(3) Non-Profit Corporation “The Climate Trust promotes climate change solutions by providing high quality greenhouse gas offset projects and advancing sound offset policy.” 3 Main Programs • Oregon Power Plant Offset Program • Greenhouse Gas Offset Partnership Program • Offset Policy Initiative 4

5. Who is The Climate Trust?Independent Buyer of GHG Offsets Market Leader • One of the largest, most experienced offset buyers in US and world markets • Only state-recognized offset provider • Portfolio: 11 projects, $4.5 million, 1.7 million metric tons CO2 • Pipeline: Placing $7 million more now 5

6. Who is The Climate Trust?Promoting Sound Offset Policy Offset Policy Resource • Contributing directly to viability and integration of offset policy at national, regional and state levels • RGGI, California, Massachusetts, Washington • USEPA, 1605(b), Senator Domenici & Bingaman Climate Change White Paper • Outreach and Communications • UNFCC Conference of Parties, International Emissions Trading Association, CarbonExpo, California Climate Action Registry, National Association of Regulatory Utility Commissioners 6

7. Economic and Policy Rationale for Offsets

8. What is an Offset? (theory) Specific Project That Reduces GHG Levels CO2 emissions The baseline case Baseline emissions Offsets Project emissions The project case / monitoring & verification years Project begins Project ends 8

9. Truck Stop Electrification What is an Offset? (practice)Specific Project That Reduces GHG Levels • I-5 Corridor in OR and WA • “Shutting-down-and-plugging-in” shifts from diesel idling to lower carbon grid electricity • 90,000 metric tons CO2 • Saving estimated 10 million gallons of diesel fuel • Emissions co-benefits: • 1,400 tons of nitrogen oxides (NOx), 40 tons of particulate matter (PM) • 16 year contract 9

10. Policy Rationale for OffsetsMore Money for Other Priorities • Effective in reducing GHG levels • Lower climate change mitigation cost to society • Funding driver • into un-capped sectors • into new & innovative technology • Economic co-benefits • Create jobs; save money on energy; enhance energy security by reducing oil imports; create demand for clean energy products. • Environmental co-benefits • Reduce air pollution; preserve biodiversity; improve habitat, watersheds, and water quality; reduce soil erosion; protect endangered species 10

11. Economic Rationale for OffsetsEstimated Ranges for Mitigation Costs Illustrative GHG mitigation prices • US Offsets (Climate Trust) $4 - $7/ton • Kyoto CDM offsets $9 - $12/ton • Allowances in Europe $~25+/ton • Efficiency* $15 - $40/ton • Wind Green Tags ($10/mWh) $~15/ton • Geo-Sequestration More *Cost to utility for mitigation in conventional coal plant 11

12. Economic Rationale for OffsetsPower of the Market • “Offsets specifically expand the scope of the program and serve to unleash the power of the market to stimulate innovation and cost-effectively reduce emissions.” • Pew Center on Global Climate Change* • “Offsets help protect the market against price volatility and … reduce the transaction costs of the emissions trading market by increasing market liquidity.” • The Nature Conservancy* *Senators Domenici & Bingaman White Paper 12

13. * Why are Offsets Important? “Cap and Trade” Logic: The gains of trade $10 Will buy at $9 and save $1 $8 Will sell at $9 and make $1 Marginal cost of GHG reduction for given “market” Offset Innovation: Capturing Further Efficiencies Will buy at $5 and save $5 $10 Will buy at $5 and save $3 $8 $5 Will sell at $5 and make $5 Marginal cost of GHG reduction with offsets 13 *Prices are for illustrative purposes only

14. Offsets Fill a Crucial Need: NowCritical to Transition to Lower Carbon Economy • Bridge the Technology Gap • Cheap Coal; IGCC; Geological sequestration • Pew Center for Global Climate Change: “[I]t will take decades to transition capital stock of power generating plants to low carbon sources, so there is a critical need for offsets as a way of cutting net emissions affordably in the short and medium term.”* • “Fundamental Principle” of GHG Policy • “… [All sectors should be required to contribute to the climate solution, whether they participate as capped sectors or as offsets. The rationale for this is that climate change is such a large problem that all sectors should be asked to be part of the solution even source that are designated as offsets.” – Center for Clean Air Policy* *Senators Domenici & Bingaman White Paper 14

15. Offsets are an Established Policy Option

16. Where are Offsets Traded Now? • Kyoto Protocol • Joint Implementation, Clean Development Mechanism • EU Emissions Trading Scheme • New South Wales • Voluntary Markets • PG&E, Ford, British Airways, Nike • Climate Trust, CCX 16

17. Offsets in State Policy • Oregon CO2 Standard • Washington Standard • Massachusetts Standard • California • “The focus [in Oregon and Washington] is to ensure high-quality, cost-effective offsets that provide a permanent and viable nexus between those responsible for climate change emissions and the currently available solutions to reduce and eliminate those emissions over time. A program similar to the Climate Trust program should be considered for California.” • Climate Change Action Team Report to the Governor (March 2006) 17

18. Offsets in Regional Policy • Regional Greenhouse Gas Initiative • 50% of required reductions can be offsets • “[T]he RGGI offsets component is a flexibility mechanism that provides a measure of insurance against high allowance prices. By allowing a wider range of technical options outside the electric power sector to be used to achieve emissions reductions, compliance costs will be lowered.” • RGGI Staff Working Group Evaluation of Offsets Supply and Potential Demand 18

19. Offsets in Federal Policy • Senator Domenici and Bingaman White Paper • Extensive discussion of offsets • Offset Pilot Program • McCain-Lieberman Climate Stewardship Act • 15% of required reductions can be from offsets • Senator Feinstein’s Strong Economy and Climate Protection Act • Substantial offset provisions, particularly in the agricultural sector 19

20. Importance of Offset Quality

21. Quality Projects: Selection CriteriaRigorous Internal and External Review Process • Primary selection factors • Additionality • Cost effectiveness: $/metric ton of GHG benefit • Reliability of technology • Reliability of project partner • Other project selection factors include: • Monitoring & verification - Replicability • Permanence - Expandability • Guarantees - Portfolio diversity • Location of project - Co-benefits

22. Quality Projects: Additionality Projects Must Create New Emissions Benefits • Mitigation measures that would not occur without offset project funding • Excludes common practice, regulated activities • Money making projects eligible, if other barriers • Types of barriers offset funding overcomes • Limited or no access to capital • Investment hurdle rate • No economic return • High perceived risks • Resource availability • Infrastructure 22

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24. Quality Projects: Quantification Experts Prepare Baseline Studies and M&V Plan • Baseline study • Build in expected changes from business as usual • Monitoring & Verification Plan • Measurement technique • Periodic measurement • 3rd party verification • Funding plan • Escrow to ensure sufficient M&V funding • Results used in contracts to verify delivery 24

25. Ensuring Quality & Mitigating RiskTop Priority for The Climate Trust • Due diligence during project review • Technology and its offset attributes • Offset provider • Portfolio diversity mitigates risk • Structuring our contracts to mitigate risk • Preserving our capital • Reducing the risk of underperformance • Defining the ownership of offsets 25

26. Preserving Offset Fund Capital Capital Preservation is a Fiduciary Responsibility • Pay after the event creating the offsets • Pay for verified tons as they occur • Pay for program installation of measures • Pay upon commercial operation (Engineer’s or 3rd party certification) • Conditions precedent to closing (Rely on senior lenders) • Security interest in project equipment 25

27. Reducing Underperformance RiskEnsuring We Get Tons After We Pay Our Money • Most contracts include delivery guarantees • Full or partial guarantee of quantity of tons • Takes several forms • Replace tons if a shortfall occurs • On power generating projects where we pay upon commercial operation, we require a guarantee of the anticipated quantity of tons • Give money back • Program offsets include performance milestones; Trust can de-obligate • Active role in managing our offset contracts • Define remedies for underperformance based on regular reporting 26

28. Defining the Ownership of OffsetsEstablishing Legal Basis for a New Commodity • Extensive legal definitions regarding offsets • Developer transfers any and all rights to CO2 reductions • Bill of Sale • Annual Offset Certificate • Third party verification of the quantity of offsets delivered • Programmatic offsets: Participation agreements create a clear ownership trail to tons of CO2 27

29. Avoiding Double CountingCritical to Environmental Integrity • Seller exclusions: • Seller can’t sell the same tons to another entity • Seller can’t use the tons for other purposes • No sale of CO2 in environmental products • E.g., Green Tags • Disclosures and disclaimers: • Written disclaimers from all partners & participants • Disclose sale to regulatory authorities & others • Define what “bragging rights” are OK 28

30. Offsets Support the Oregon GHG Strategy’s Guiding Principles

31. Science-Based & Effective Reductions • Principle A: Oregon’s reduction goals and solutions should be firmly grounded in science and lead to effective GHG reductions • Offsets yield real emissions reductions based on rigorous monitoring and third party verification. 31

32. Cost-Effectiveness • Principle B: The Task Force shall begin with the most cost-effective solutions first. • Offsets direct funding towards the lowest-cost mitigation source. • Utilized only when they are more cost-effective than other means. • Flexibility afforded by offsets will help the load serving entities meet their emissions reduction targets most efficiently and most cost-effectively. 32

33. Offsets Especially Relevant in a ‘Two-Player’ Market • Oregon: • Two capped entities with large carbon footprints and several smaller entities with small footprints • Placeholder: Price cap of $40/ton • Without offsets: • Trading more prone to gaming and likely to occur close to the price cap • With offsets: • Offset price is another price point in the mix • Capped entity has alternative, (lower) cost option • Drive down overall cost of program 33

34. ‘Two-Player’ Market Cap and Trade: No offsets $30 Will buy at $30 or less $15 Will sell at $16 or more Transactions may move towards highest marginal cost Cap and Trade ‘Plus’: Offsets offer alternative price Will buy at $30 or less $30 Will sell at $16 or more $15 $10 Will sell $10 or more Transactions more likely to move to lower marginal cost 34

35. Economic Development & Innovation • Principles C, E & G: High level of emphasis on economic development and long-term economic well-being of Oregon economy. • Oregon can use the transition to clean energy as an engine for economic development. • Offsets encourage development by driving funding to technologies that reduce GHG emissions. • Utilize agricultural sector and rural assets • Capitalize on Oregon’s unique leadership • Climate Trust, Bonneville Environmental Foundation, Energy Trust of Oregon 35

36. Equity • Principle J: Addresses equitable allocation of costs and benefits when implementing the Strategy. • Offsets essentially transfer money from those causing climate change to those feeling its effects and those best equipped to immediately contribute to its solution. 36

37. Conclusion • Offsets directly support the OR GHG Strategy’s Guiding Principles • OR should build on the millions of dollars successfully invested (and being invested) in offset projects • Another “Oregon First” for the policy arena • There is a strong independent rationale for offsets • policy & economic benefits • Offsets are a widely recognized and accepted • globally, nationally, regionally, and other states • Offset quality is driving acquisitions 37

38. Thank You Michael Ashford Deputy Director The Climate Trust (503) 238-1915 mashford@climatetrust.org 38