Greenhouse Gas Offsets: Their Importance and Role in a Load-Based Cap System

1. Greenhouse Gas Offsets:Their Importance and Role in a Load-Based Cap System Presentation to California PUC Symposium on Flexible Compliance Mechanisms in a Market-Based GHG Cap System April 20, 2007 Mike Burnett Executive Director mburnett@climatetrust.org 503-238-1915

2. Today’s Topics • Overview of the Oregon CO2 Standard and The Climate Trust • Greenhouse Gas Offsets: How They Work and Why They are Important • Offsets in Oregon’s Carbon Allocation Task Force Design for a Load-Based Cap and Trade System • Transition to the Future: Project to Protocol

3. Overview of the Oregon CO2 Standard and The Climate Trust

4. Overview of Oregon CO2 PolicyFirst Legislative CO2 Regulation in the US • Regulates CO2 • New power plants must offset a significant portion (~17%) of their CO2 emissions • Unique Non-Profit Role • Developer can comply by paying a per-ton fee to The Climate Trust, which acquires CO2 offsets

5. Who is The Climate Trust?Offset Market Pioneer and Quality Leader • Non-profit based in Portland, Oregon • One of largest offset buyers in US • Only state-recognized supplier of regulatory-grade offsets • Experienced offset practitioner: Since 1999 • Portfolio: 18 projects, $9 million, 3 million tons CO2 • Pipeline • Oregon Program: Placing $2.6 million into new projects this year • Large Emitters: 10+ million ton acquisition, largest in US to date • Quality reputation with regulators, business, and environmental groups

6. The Climate Trust: 3 Main ProgramsProviding Offsets and Advice • Oregon Power Plant Offset Program • Greenhouse Gas Offset Partnership Program • Large Emitter Customized Offsets • Donate-to-Offset • CarbonCounter.org • Employee Offset Program • Offset Policy Initiative • Advice to Oregon, Washington, RGGI, California … • Assisting in voluntary market standards development

7. Cornerstones of Our Offset PortfolioQuality Offsets are Trust’s Highest Priority • Diverse portfolio • High eligibility standards • Rigorous process and review • Strong carbon contracts • Competitive price compared to offset market

8. 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

9. Solicitation StructureTwo-Phase Process • Phase 1: Short form proposals • Provides project summary information • Limited to 10 pages • Budget spreadsheet • CO2 benefit spreadsheet • Phase 2: Detailed proposals • Selected bidders will be invited to submit detailed proposals and respond to project specific questions from staff • Phase 3: Negotiation and Contracting • Climate Trust enters into negotiation with selected bidders

10. Cogeneration Blended Cement Industrial Efficiency Rainforest Reforestation Wind Energy Efficiency Truck Stop Idle Reduction Traffic Signal Optimization Streamside Reforestation Diverse, High Quality Offset PortfolioA Sampling of Our 18 Projects

11. Greenhouse Gas Offsets:How They Work andWhy They are Important

12. Policy Rationale for OffsetsImportant Tool for Countering Climate Change • Quality reductions: IF DONE RIGHT, equally effective in reducing atmospheric GHG levels as on-site mitigation • Lower cost: Offsets are only used if lower cost • Lowers climate change mitigation cost to society • More money for everything else: • Food, shelter, health, security, recreation • Technology bridge: Allows reductions now while new low-carbon technology is developed • Co-Benefits: Environmental and economic

13. Where Do Offsets Fit? In the Mitigation “Pecking Order” • Offsets are an important but minority part of the climate solution • Balanced 4-step process: • Cut waste • Invest in efficiency • Buy renewables for your electricity • Offset the rest • Applies equally to companies and policy (and individuals)

14. What is an Offset?Concept Originated in Accounting in 1769 • Dictionaries tell us that a GHG offset… 1. Cancels out emissions 2. That are recorded in a GHG ledger (or the atmosphere) 3. With an end effect as if the cancelled emissions had not occurred • A “compensating equivalent”

15. What is a Greenhouse Gas Offset?A High Quality Environmental Commodity • A greenhouse gas offset is a specific project implemented to displace, avoid, or sequester greenhouse gases • The reduction is “abstracted” from the underlying project and sold by the offset project owner • The offset is used as a “compensating equivalent” for GHG emission reductions occurring at another source with an end effect as if the cancelled emissions had not occurred

16. Onsite Reduction OffsiteReduction Baseline Reduction Target Total GHG Emissions BEFORE AFTER BEFORE AFTER Offset Project Facility The Basic Promise That an Offset Makes A “Compensating Equivalent” to Facility Reductions The Basic Promise: An emitter must invest in its own facility to implement facility reductions. As an alternative, when investing offsite (in offsets) for reductions, the project must similarly be dependent on offset funding. $ $

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

18. Truck Stop Electrification What is an Offset? (practice)Specific Project That Reduces GHG Levels • “Shut down and plug in” • Shifts from diesel idling to lower carbon grid electricity • I-5 Corridor in OR and WA • 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

19. Quality Offsets: AdditionalityOffsets are a High Quality Environmental Commodity • The “IF DONE RIGHT” caveat • “Additional”: Mitigation measures that would not occur without offset project funding • Excludes common practice, regulated activities • Overcome barriers: Capital unavailable, investment hurdle rate, no economic return, high perceived risks • Money making projects eligible, if other barriers • Project must go beyond business-as-usual baseline (not base year) • “Environmentally additional” is a subset of “environmentally beneficial” • All GHG benefits are not suitable for offsets

20. Pre Compliance GHG Level Post Compliance GHG Level Facility Baseline Total GHG Emissions Reductions Target Legend Offset Project Before Reductions After Internal Compliance After Offset Compliance Non-Additional Offset “Compliance” Facility Why Additionality MattersEnsures Real Reductions (= “If Done Right”)

21. Quality Offsets: 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 • Results used in contracts to verify delivery • Enter in offset registry

22. Quality Offsets: OwnershipEstablishing 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

23. Contracts: No 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

24. Environmental Integrity: ParamountEqually Important for Regulatory & Voluntary Markets • Purpose of offsets is not … • Market transformation • Building a trading market • But rather tightly accounted tons reductions • Environmentally additional is a subset of environmentally beneficial • All GHG benefits are not suitable for offsets • Voluntary market integrity is crucial to the inclusion of offsets in policy mechanisms

25. Offsets in Oregon’s Carbon Allocation Task Force Design for a Load-Based Cap and Trade System

26. Offsets: CATF Design15-Month Stakeholder Consensus Process • Full conceptual design of a load-based cap and trade system • Presented to Governor in January 2007 • One of several climate bills that Legislature may consider this session • RPS, biofuels highest priority • Then omnibus climate bill, EPS, and finally cap and trade • May roll over into 2008 extended session

27. Offsets: Important Minority RoleDrive Technology Change in Uncapped Sectors • State has been an offset leader • CO2 Standard: Positive experience • Continuing to lead on offset quality is important • Developing in-state offset capacity important • Technology suppliers and intellectual capital • Adds “3rd leg” to LSE purchase options • Purchase allowances from surplus LSE • Purchase at auction • Purchase offsets • Why minority role? Primarily want to drive LSE investments in low-carbon technology

28. Offsets: Design ParametersBalancing Many Stakeholder Viewpoints • Minority component • 25% of reductions from base year (not reductions from growing business as usual • Need for offsets should decline over time • LSEs need more flexibility early • Need functioning offset capability at beginning of cap system • Develop state and supplier capacity • Offset suppliers need certainty: • Project eligibility & accounting; Saleable

29. Important Minority Role OffsetsLimited to 25% of Reductions from Base Year

30. Offsets: DefinitionsEvolution from Oregon CO2 Standard • In addition to surrendering state-issued allowances, an LSE could surrender a limited number of GHG offsets • Offsets are credits for reductions from outside the electrical sector or other regulated sectors. • Offsets allowed from 6 GHGs: • CO2, methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and hydrofluorocarbons (HFCs) • Based on CO2–equivalent global warming potential

31. Offsets: ProcessFrom Legislation to Rulemaking to Implementation • Legislation: Subsequent rulemaking to assure that all GHG offsets are real, quantifiable, verified, additional, permanent, and enforceable • ODOE rulemaking to determine eligibility • Additionality, type, source, vintage, permanence • ODOE would establish protocols to quantify, verify and retire those offsets • Administrative fee to cover state’s costs of offset program

32. Transition to the Future: Project to Protocol

33. Project-to-ProtocolImportant Transition Phase in Offset Market • Historical offset market has been project-based • Shifting to standardized protocols • Currently, demand for offsets (and supply of desirable offset types) exceeds the “supply” of standardized protocols • Project-to-Protocol approach implements individual projects using rigorous criteria, and uses them as a basis for standardized protocols • Helps develop supply of quality of reductions while developing replicable protocols

34. Thank You! Mike Burnett Executive Director mburnett@climatetrust.org 503-238-1915