California: Outwards, Not Inwards

Sean Penrith, The Climate Trust
July 6, 2017

We are part of the frontier mobilizing billions in potential impact capital to invest in real, verified, and permanent reductions. Current deliberations in the California Capital are contemplating significantly reducing the offset utilization limit as part of the package to extend the cap and trade program post-2020. Simply put, we believe the lowered offset limit would be satisfied with already developed and financed offset projects – effectively killing new investment in forestry or agricultural greenhouse gas mitigation.

Because the post-2020 uncertainty in California significantly limited offset investment in infrastructure or land-based projects, in October 2015 The Climate Trust launched a $5.5 million pilot investment fund with a Program Related Investment from the Packard Foundation, and support from USDA to make investments into forestry and agricultural projects based on the value of the carbon credits they will generate over a ten-year period. We have invested one-third of that fund, and anticipate investing the remaining capital this year.

Based on the success of that pilot, we have hired a Director of Investments and begun fundraising to build a $100 million of fund to make similar long-term carbon investments to spark the development of forestry and agricultural greenhouse gas mitigation projects throughout the United States. $2 billion in impact capital is watching.

We are deeply concerned that the current proposal to lower the offset limit will eliminate all opportunity to invest and effectively kill the development of any new offset projects. Applying the historic offset utilization rate (roughly 50.5% of the 8% limit), we anticipate the California market would demand only 30.2 million offsets from out of state projects through 2030 with the 2% and then 3% out of state limit (note the offset utilization rate may actually fall below historic levels, as fewer buyers can justify the costs at these lower limits). According to Finite Carbon, a forest carbon project developer, the forestry projects that have already been developed (which generate credits for 25 years) will alone generate 30 million credits—enough to satisfy the out of state limit. Given this significantly reduced demand, the California market would no longer serve as a driver for new forestry and agricultural reductions.

If the proposal were to pass, our carbon investment fund would immediately stop fundraising for the $100 million in impact capital to invest in land-use reductions that are key to meeting long-term climate goals.

As Oregon residents, we are also deeply concerned that this California-oriented proposal will kill momentum for our state to implement a cap-and-trade system within the Western Climate Initiative framework. Just today, 33 legislators from the Oregon Senate and House introduced the cap and trade bill SB 1070 that includes an 8% offset limit and does not discriminate against out-of-Oregon reductions. We’re concerned that protectionist California policy on offsets could cause Oregon to turn inwards as well.

It is good to see Brown supporting the Paris Agreement that calls for international collaboration to combat climate change at an unprecedented scale. He sends a needed U.S. signal given the alarm sounded by a prominent group of scientists that we have until just 2020 to curb global greenhouse gas emissions before it becomes impossible to manage safely. That same Paris Agreement includes Article 6 that calls for a mechanism to allow the exchange of Internationally Transferred Mitigation Outcomes or emission reduction credits.

Over half the signatories to the Paris Agreement include carbon trading. This makes economic sense. The World Bank’s 2016 Carbon Pricing State & Trends Report found that greater cooperation through carbon trading could reduce the cost of climate change mitigation by 32% by 2030. Now is not the time for the California system to extend its program without these very same collaborative principles in place that deliver real reductions, cushion price impacts, address uncapped sectors, and allow market harmonization.

California, please continue to look outwards.

Image credit: Flickr/USDA NRCS