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

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

Carbon Allocation Task ForcePresented by: Michael Ashford

June 1, 2006

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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

Background on The Climate Trust

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“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

The Climate Trust Mission: Offsets

The Trust is a 501(c)(3) Non-Profit Corporation

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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

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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

Economic and Policy Rationale for Offsets

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CO2 emissions

years

Baseline emissions

Project emissions

Project begins Project ends

Offsets

The baseline case

The project case / monitoring & verification

What is an Offset? (theory) Specific Project That Reduces GHG Levels

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Truck Stop Electrification

• 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

What is an Offset? (practice)Specific Project That Reduces GHG Levels

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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

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Economic Rationale for OffsetsEstimated Ranges for Mitigation Costs

Illustrative GHG mitigation pricesUS Offsets (Climate Trust) $4 - $7/tonKyoto CDM offsets $9 - $12/tonAllowances in Europe $~25+/tonEfficiency* $15 - $40/tonWind Green Tags ($10/mWh) $~15/tonGeo-Sequestration More

*Cost to utility for mitigation in conventional coal plant

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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

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Why are Offsets Important?“Cap and Trade” Logic: The gains of trade

$8

$10

Marginal cost of GHG reduction for given “market”

Will buy at $9 and save $1

Will sell at $9 and make $1

Offset Innovation: Capturing Further Efficiencies

$5

Marginal cost of GHG reduction with offsets

$8

$10 Will buy at $5 and save $5

Will buy at $5 and save $3

Will sell at $5 and make $5

*Prices are for illustrative purposes only

*

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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

Offsets are an Established Policy Option

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Where are Offsets Traded Now?

• Kyoto ProtocolJoint Implementation, Clean

Development Mechanism

• EU Emissions Trading Scheme• New South Wales

• Voluntary MarketsPG&E, Ford, British Airways, NikeClimate Trust, CCX

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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)

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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

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Offsets in Federal Policy

• Senator Domenici and Bingaman White PaperExtensive discussion of offsetsOffset Pilot Program

• McCain-Lieberman Climate Stewardship Act15% of required reductions can be from offsets

• Senator Feinstein’s Strong Economy and Climate Protection ActSubstantial offset provisions, particularly in the

agricultural sector

Importance of Offset Quality

Quality Projects: Selection CriteriaRigorous Internal and External Review Process

• Primary selection factorsAdditionalityCost effectiveness: $/metric ton of GHG benefitReliability of technologyReliability of project partner

• Other project selection factors include:Monitoring & verification - ReplicabilityPermanence - ExpandabilityGuarantees - Portfolio diversityLocation of project - Co-benefits

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Quality Projects: Additionality Projects Must Create

New Emissions Benefits• Mitigation measures that would not occur

without offset project fundingExcludes common practice, regulated activitiesMoney making projects eligible, if other barriers

• Types of barriers offset funding overcomesLimited or no access to capital Investment hurdle rateNo economic returnHigh perceived risksResource availability Infrastructure

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Quality Projects: Quantification Experts Prepare Baseline Studies and M&V Plan

• Baseline studyBuild in expected changes from business as

usual

• Monitoring & Verification PlanMeasurement techniquePeriodic measurement3rd party verificationFunding plan

• Escrow to ensure sufficient M&V funding

• Results used in contracts to verify delivery

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Ensuring Quality & Mitigating Risk

Top Priority for The Climate Trust• Due diligence during project review

Technology and its offset attributesOffset provider

• Portfolio diversity mitigates risk

• Structuring our contracts to mitigate riskPreserving our capitalReducing the risk of underperformanceDefining the ownership of offsets

Preserving Offset Fund Capital

Capital Preservation is a Fiduciary Responsibility

• Pay after the event creating the offsetsPay for verified tons as they occurPay for program installation of measuresPay upon commercial operation (Engineer’s or

3rd party certification)Conditions precedent to closing (Rely on senior

lenders)Security interest in project equipment

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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

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Defining the Ownership of Offsets

Establishing 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

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Avoiding Double CountingCritical to Environmental Integrity

• Seller exclusions:Seller can’t sell the same tons to another entitySeller can’t use the tons for other purposesNo sale of CO2 in environmental products

• E.g., Green Tags

• Disclosures and disclaimers:Written disclaimers from all partners &

participantsDisclose sale to regulatory authorities & othersDefine what “bragging rights” are OK

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Offsets Support the Oregon GHG Strategy’s

Guiding Principles

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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.

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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.

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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 mixCapped entity has alternative, (lower) cost

optionDrive down overall cost of program

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‘Two-Player’ Market

Cap and Trade: No offsets

$15

$30

Transactions may move towards highest marginal cost

Will buy at $30 or less

Will sell at $16 or more

Cap and Trade ‘Plus’: Offsets offer alternative price

$10

Transactions more likely to move to lower marginal cost

$15

$30Will buy at $30 or less

Will sell $10 or more

Will sell at $16 or more

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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 leadershipClimate Trust, Bonneville Environmental

Foundation, Energy Trust of Oregon

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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.

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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 projectsAnother “Oregon First” for the policy arena

• There is a strong independent rationale for offsetspolicy & economic benefits

• Offsets are a widely recognized and acceptedglobally, nationally, regionally, and other

states

• Offset quality is driving acquisitions

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Thank You

Michael AshfordDeputy Director

The Climate Trust(503) 238-1915

[email protected]