Mik McKee, The Climate Trust
As published by TriplePundit – December 3, 2015

In late October, the California Air Resources Board (ARB) held a public workshop to present a white paper discussing the possibility of including international sector based offsets in California’s cap and trade program. While the white paper was the work of ARB staff, it was developed in consultation with the Governors’ Climate and Forests Task Force (GCF)—a group comprised of 29 different subnational jurisdictions, including states and provinces from Brazil, Indonesia, Mexico, Spain, and the United States, among others. The primary focus of the paper was to assess and provide recommendations for how carbon offsets generated through the United Nations’ initiative on Reducing Emissions from Deforestation and forest Degradation (REDD) could meet emissions reductions targets established by California’s Global Warming Solutions Act of 2006 (Assembly Bill 32 or AB 32).

While ARB has not yet approved REDD or other international sector based offsets for use to meet compliance obligations under AB 32, ARB staff have presented a compelling argument for why REDD offsets should be allowed for the third compliance period starting in 2018.

Perhaps most persuasive, given the impending 2015 Paris Climate Conference (COP21), is that California has established itself as a leader in combating climate change. Additionally, as the more than 195 international parties attending COP21 demonstrate, climate change is a global problem. ARB staff therefore suggest that approving REDD offsets not only perpetuates California’s leadership role, but also that REDD offsets increase the state’s impact by incentivizing carbon sequestration on a global rather than national scale.

The second compelling point made by ARB staff is that REDD offsets will provide a cost effective option for entities required to meet the emissions cap. A year ago this argument may not have stood up. However, in 2015 the price of California Carbon Offsets (CCOs) has steadily ticked up to the point where they are now only 8-10% below the price of Allowances. This situation is potentially compounded by the fact that some carbon analysts predict there will be an offset shortage in the near-term.

This is somewhat of a nuanced argument because many (author included) believe the price of carbon is too low. Indeed the United States Environmental Protection Agency places the 2015 social cost of carbon, which is essentially the price society will pay for inaction, at $40 per metric ton of CO₂.  Furthermore, higher carbon prices would lead to greater market participation resulting in additional co-benefits beyond carbon sequestration.

However, the long-term success of offset programs like AB 32 also depends on a certain level of price confidence. If demand and supply do not grow rationally, the result could be a catastrophic end to the market, similar to what happened with the Chicago Climate Exchange.

The challenge before ARB staff is to ensure that international sector based offsets meet the same standards as California Carbon Offsets. Ultimately, three main tests lie before ARB staff: First, ARB staff must be certain that REDD projects sequester carbon beyond business as usual; second, REDD offsets must truly be quantifiable; and third, participating jurisdictions must be able to ensure that these offsets meet permanence requirements.

If ARB staff cannot prove beyond doubt that REDD offsets are real, additional, and permanent, approving REDD offsets will undermine the integrity of California’s cap and trade program. However, tropical forests provide innumerable benefits, including being one of the world’s greatest carbon sinks. If the inclusion of REDD based offsets in California’s cap and trade program leads to greater protection and improved management of these forests, the benefits will be global.