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The Value of Offsets in Oregon

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Title: The Value of Offsets in Oregon


1
The Value of Offsets in Oregons 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 Strategys Guiding
    Principles

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

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

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

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
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

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

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
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
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
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 It 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
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
  • PGE, Ford, British Airways, Nike
  • Climate Trust, CCX

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)

18
Offsets in Regional Policy
  • Regional Greenhouse Gas Initiative
  • 50 of required reductions can be offsets
  • The 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

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 Feinsteins Strong Economy and Climate
    Protection Act
  • Substantial offset provisions, particularly in
    the agricultural sector

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

23
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24
Quality Projects Quantification Experts Prepare
Baseline Studies and MV 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 MV funding
  • Results used in contracts to verify delivery

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

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 (Engineers 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 cant sell the same tons to another entity
  • Seller cant 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 Strategys
Guiding Principles
31
Science-Based Effective Reductions
  • Principle A Oregons 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.

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.

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

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
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 Oregons unique leadership
  • Climate Trust, Bonneville Environmental
    Foundation, Energy Trust of Oregon

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.

37
Conclusion
  • Offsets directly support the OR GHG Strategys
    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

38
Thank You
  • Michael Ashford
  • Deputy Director
  • The Climate Trust
  • (503) 238-1915
  • mashford_at_climatetrust.org
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