Carbon Offsets in International and Domestic Climate Regulation

1
Carbon Offsets in International and Domestic
Climate Regulation

• Michael Wara
• March 21, 2008
• National Assoc. of Env. Law Schools

2
The role of offsets in climate regulation

• The Kyoto Protocol
• Carbon markets
• Successful growth of a global carbon market
• Problems with environmental credibility and cost
  control
• Consequences for US linkage to global carbon
  markets

3
The Kyoto Protocol

• Protocol to UNFCCC
• Complete participation except for US,
  Lichtenstein
• Developed country emissions of six GHGs
• Agreement negotiated in 1997 to 2000
• Targets for 2008-2012 relative to 1990
• Numerous compliance flexibility mechanisms
• Emissions trading
• Joint Implementation
• Clean Development Mechanism

4
What is a carbon offset?

• Cap-and-trade ? Permit to emit (allowance)
• Offset market ? Emission reduction Credit
  (offset)
• How credits are generated
• Baseline
• Additionality
• Leakage
• Tough to be a Regulator
• Hypothetical determination - BAU emission not
  observed
• Information assymetry - proponents know more
• Seller/Buyer incentives are similar - issue
  credit
• Inducing participation
• Tradeoff between environmental and investor risk

5
Growth of the international offset market
Gas-fired power Waste Heat Renewables CH4
Capture Industrial Gases
Data Jørgen Fenhann, UNEP Risø Centre
6
China is the dominant producer of CDM credits
7
CDM in the Chinese Power Sector

• Comparison of new builds to CDM applications in
  China

Nameplate Capacity (GW)
Hydro
Wind
Natural Gas
8
Developing country incentives

• EPA Estimate of S 280 offset demand 1 billion
  tCO2e/y
• Estimated value of 17 per tCO2e/y ? 17
  billion/y
• CDM project terms of up to 21 years
• Why give up the side payment for a cap?

9
Conclusions

• CDM is the lasting achievement of the Kyoto
  Protocol
• Market design/reform is a key issue for post-2012
  climate negotiations
• Also important is diversifying the portfolio for
  developing country engagement how do we access
  the power sector?
• Linkage and Domestic offsets are key issues issue
  for cap-and-trade design

10
Questions?

• Michael Wara
• mwara_at_stanford.edu
• 415-250-9730