Verification of Early Reduction Credits

1
Verification of Early Reduction Credits

• Ned Helme, President
• Center for Clean Air Policy
• Pew Center Early Action Conference, Sept 1999

2
Overview

• Verifying voluntary emissions reductions
• Baselines
• Actual emissions
• Verifying 1605(b) credits
• An alternative approach to early crediting

3
Establishing Baselines

• Emissions reductions are measured against a
  baseline or reference case
• e.g., historic emissions levels
• To prevent gaming, legislation should reward
  credits for company-wide reductions only
• thus baselines must be company-wide
• Only significant sources/gases need be included

4
Baselines, II

• Companies should submit inventories documenting
  base year emissions
• Like national inventories Emissions Fuel
  consumption x emissions factor
• Direct measurement not needed
• Key verification issue centers on establishing
  accurate historic baseline - proxy available w/
  fuel consumption record

5
Calculating Actual Emissions

• As with baselines, should be calculated on a
  company-wide basis by multiplying activity data
  by emissions factors
• Both baseline and actual emissions can be
  converted to emissions/output if necessary - more
  difficult to choose metric w/ non-electricity
  sources

6
Verifying Reductions

• Baselines should be certified prior to program
  inception - voluntary early redux depend
  fundamentally on this step
• Actual emissions should be verified annually
• Check math, activity data, emissions factors
• Check numbers back to invoices, other records

7
Private Sector Role in Verifying Reductions

• May be useful to require third party verification
  of credits
• Could be done by accounting firms (e.g., Big 6),
  verification firms (e.g., SGS)
• Auditors would have to be certified, follow
  pre-established guidelines
• Third party involvement would allow for more
  comprehensive auditing (as opposed to sampling a
  la IRS)

8
Verifying 1605(b) credits

• Will be necessary to separate legitimate
  reductions from others
• Limit credit for single projects if company has
  not reported on company-wide basis
• Process should be transparent, simple to
  implement
• Not case by case analysis by implementing agency
  - too costly and time-consuming

9
Verifying 1605(b) credits, II

• One alternative Reward credits to participants
  that surpass industry benchmarks
• e.g., develop industry average for utility heat
  rate improvements and reward above that
• bulk of redux so far are concentrated in certain
  industries and sectors - would not require that
  many benchmarks
• cap available credits at 1

10
Problems with Voluntary Approach

• Even rigorous verification will not ensure that
  credits are real if program is not structured
  properly
• Baselines may be set to allow for non-additional
  tons
• Hard to use rate-based approach in sectors other
  than power
• Participants may shift high-emissions assets
  elsewhere

11
An Alternative Approach to Early Crediting

• Early mandatory cap-and-trade program with
  auction (RFF) is preferable alternative
• beginning in 2002, set overall cap equal to 1996
  annual emissions level, auction permits with
  point of regulation upstream
• allows escape hatch where companies can choose
  to pay 25/ton carbon in lieu of making full
  reductions

12
Alternative Approach (cont)

• provides greater environmental benefits
• no questions about whether redux are real
• less prone to gaming - transfer of assets does
  not avoid regulation or bolster early credit
  claims
• assists in moving economy more smoothly toward
  Kyoto compliance

13
Alternative Approach (cont)

• simplifies verification problems
• no issues regarding historic baseline
• upstream so fewer entities to audit

14
Conclusion

• Verification of emissions should be
  straightforward if company-wide approach to early
  crediting is taken
• Review activity data, verify emissions factors
• Even so, the voluntary nature of the program
  introduces questions about credit quality
• A mandatory approach to early crediting would be
  environmentally superior