California Signals Long-Term Demand for Offsets

Peter Weisberg, The Climate Trust
Weekly Policy and Finance Update – March 12, 2018

THE BOTTOM LINE.

With the passage of AB 398, an extension of California’s cap and trade program through 2030, and its preference for offset projects with “direct environmental benefits” to the state, long-term demand for offset projects outside of California has been called into question. Without resolving this uncertainty, the preliminary discussion draft released by the CA Air Resources Board (ARB) for its March 2nd workshop, sends a bullish signal to these projects that ARB could follow a broad interpretation of what qualifies as providing a direct environmental benefit. This strategy could potentially avoid a constitutional challenge that this requirement violates the commerce clause and also enable offsets to play a larger role in containing costs in California’s cap and trade system.

Under ARB’s “potential staff proposal” for establishing direct environmental benefits, projects that can show air pollutant reductions in California will automatically be considered to have direct environmental benefits. In the interpretation of many, ozone depleting substances projects that remove refrigerants from California are likely to have a very strong case to make that they avoid air pollutant emissions in California, even if the material is destroyed outside of the state. In addition, projects in watersheds that flow into California that reduce or avoid any pollutant that could have an adverse impact on state waters are proposed to have direct environmental benefits. Forestry and digester projects, which have significant water quality benefits in watersheds throughout the West and that eventually flow into California, may also be included as direct environmental benefit projects.

Most broadly of all, however, is the definition of direct environmental benefit in AB 398, which includes “the reduction or avoidance of any pollutant that could have an adverse impact on the waters of the state.” Climate modeling is very clear that greenhouse gas emissions anywhere have an adverse impact on California’s waters. High greenhouse gas emissions scenarios will worsen California’s snowpack loss, saltwater intrusion into the Sacramento-San Joaquin Delta due to sea level rise, sediment and contaminants in surface waters due to increased wildfire and flash flooding, overloaded sewer systems due to heavier precipitation events, and on and on.

While ARB’s proposal does not make it clear that it will accept this argument that greenhouse gas emissions anywhere “could have an adverse impact on the waters” of California, the door has been opened for that argument. How that is aligned with both the legislative intent behind AB 398 and the potential threat of a commerce clause violation still needs to unfold. Until then, unfortunately, uncertainty will remain as to how large the demand is for offset projects outside of California.

Research and Resources

Nothing But Clear Skies Blog

North American Demand for Offsets Analysis 
Peter Weisberg, Ecosystem Marketplace, Oct 27, 2017

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Image credit: Flickr/Mark Jensen