a review of offset programs: trading systems, funds, protocols, standards and retailers

8/14/2019 A Review of Offset Programs: Trading Systems, Funds, Protocols, Standards and Retailers

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A Review of Offset Programs: Trading Systems,Funds, Protocols, Standards and Retailers

Anja Kollmuss, Michael Lazarus,Carrie Lee and Clifford Polycarp

Research Report, Stockholm Environment Institute, 2008


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A Review of Offset Programs: Trading Systems,

Funds, Protocols, Standards and Retailers

Version 1.1* October 2008

Anja Kollmuss, Michael Lazarus, Carrie Lee and

Clifford Polycarp

* Version 1.0 of this report was prepared under contract to the Climate Change Division of the UnitedStates Environmental Protection Agency (68-W-06-010), under the guidance and support of Maurice

LeFranc, with management assistance by Heidi Nelson-Ries at Stratus Consulting, Inc. Version 1.1 is theSEI research report version, which contains some small editorial revisions.

The views and opinions expressed in this report are those of the authors. This report does not representthe views of the United States Government or of the US Environmental Protection Agency.


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Stockholm Environment InstituteKrftriket 2B106 91 StockholmSweden

Tel: +46 8 674 7070Fax: +46 8 674 7020E-mail: [email protected]

Web: www.sei.se

Publications Manager: Erik WillisWeb Manager: Howard CambridgeLayout: Richard Clay

Cover photo: R.Clay/SEI

This publication may be reproduced in whole or in part and in any formfor educational or non-profit purposes, without special permission fromthe copyright holder(s) provided acknowledgement of the source is made.No use of this publication may be made for resale or other commercialpurpose, without the written permission of the copyright holder(s).

Copyright November 2008 by Stockholm Environment Institute


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v

ContEntS

Acknowledgements vii

List of acronyms ix

1 Context and purpose of this review 1

2 Recent trends 4

3 A comparison of offset programs 6

3.1 General features of offset programs 7

3.2 Market size and scope 12

3.3 Offset project eligibility 19

3.4 Additionality and quantification procedures 27

3.5 Program administration and authority 33

4 International offset mechanisms 38

4.1 Clean Development Mechanism (CDM) 42

4.2 Joint Implementation (JI) 57

5 Mandatory cap and trade systems (offset features) 66

5.1 Australian Carbon Pollution Abatement Scheme 66

5.2 Canadas Offset System for Greenhouse Gases 69

5.3 New South Wales Greenhouse Gas Reduction Scheme 74

5.4 Regional Greenhouse Gas Initiative 82

5.5 Western Climate Initiative 88

6 Other mandatory systems (offset features) 92

6.1 Alberta-Based Offset Credit System 92

6.2 State Power Plant Rules of Oregon, Washington and Massachusetts 98

7 Carbon offset funds 107

7.1 World Bank Carbon Finance Funds 107

8 Voluntary cap and trade systems (offset features) 114

8.1 Chicago Climate Exchange 114

9 Voluntary GHG reduction programs 120

9.1 Climate Leaders 120

9.2 California Climate Action Registry 124

10 Voluntary GHG accounting protocols (entity-wide and offsetproject specific) 131

10.1 WBCSD/WRI GHG protocol for project accounting 131

10.2 ISO 14064 135


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vi

11 Voluntary standards for offset projects 140

11.1 Gold Standard 141

11.2 Voluntary Offset Standard 149

11.3 Voluntary Carbon Standard 2007 15211.4 Green-e Climate Protocol For Renewable Energy 161

11.5 Green-e Climate program 167

12 Offset retailers 176

12.1 The Climate Trust 176

12.2 TerraPass 181

12.3 NativeEnergy 184

12.4 Myclimate 187

General references 191

Glossary 194


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vii

ACknowlEdgEmEntS

The authors greatly appreciate the time taken by the many individuals listed below for

their clarications and enrichment of specic report sections, and for their suggestionsthat improved the overall organization and framing of this document. The authors

extend particular thanks to Derik Broekhoff of the World Resources Institute, whoseunpublished survey of standards and programs, conducted with support from theWorld Economic Forum, provided a helpful guidepost for this effort. We acknowledgethe World Wildlife Fund for their support of earlier research, which helped to build astrong foundation for this report.

Edwin Aalders, the Voluntary CarbonStandard

Tom Arnold, TerrapassMartina Bosi, the World Bank CarbonFinance Unit

Derik Broekhoff , the World ResourcesInstitute

Meinrad Buerer, the Gold StandardPhil Carver, the Oregon Department ofEnergy

Nathan Clark, the Chicago ClimateExchange

James Colman, the MassachusettsDepartment of Environmental

Protection

Nathalie Dault, the EuropeanCommission, DG EnvironmentAllen Fiksdal, the Washington EnergyFacility Site Evaluation CouncilRob Fowler, Abatement Solutions Asia Pacic

Gary Gero, the California ClimateAction Registry

Josh Harris, the Voluntary CarbonStandard

Olivia Hartridge, Morgan StanleyJudith Hull, Environment CanadaJasmine Hyman, the Gold StandardAlexia Kelly, the Climate TrustMark Kenber, the Voluntary CarbonStandard

Lars Kvale, the Center for ResourceSolutions

Maurice LeFranc, the USEnvironmental Protection Agency

Suzanne Loney, Environment CanadaDamien Meadows, the European

Commission, DG EnvironmentShahyar Niakan, the World BankCarbon Finance UnitManuel Oliva, Climate Leaders, the USEnvironmental Protection Agency

Andy Ridge, Alberta EnvironmentRobert Savage, Alberta EnvironmentMichael Schlup, the Gold StandardKai-Uwe Barani Schmidt, the UNFCCCCDM SecretariatChris Sherry, New Jersey Department ofEnvironmental Protection

William Space, the MassachusettsDepartment of Environmental

Protection

Caitlin Sparks, the Gold StandardMartin Stadelmann, myclimateAdam Stern, TerraPassTom Stoddard, Native Energy

Scott Subler, the Chicago ClimateExchange

Jim Sullivan, Climate Leaders, USEnvironmental Protection Agency

Matthew Tidwell, the Climate TrustRich Wong, Pembina InstituteThe World Bank Carbon Finance UnitsOperations Team


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viii

lISt of ACronymS

AAU Assigned Amount Unit (Kyoto Protocol)

ACP Abatement Certicate ProvidersACT Australian Capital TerritoryAIE Accredited Independent Entity

BER Baseline Emission Rate

CCAR California Climate Action RegistryCCEMA Climate Change and Emissions Management ActCCX Chicago Climate ExchangeCDM Clean Development MechanismCDM EB CDM Executive BoardCER Certied Emission Reduction

tCER temporary CERslCER long-term CERsCFI Carbon Financial InstrumentCFL Compact Fluorescent LampCHF Swiss FrancCMAC Climate Marketers Advisory CommitteeCRS Center for Resources SolutionsCO

2Carbon dioxide

CO2e Carbon dioxide equivalent

COUP Intertribal Council on Utility PolicyDFP Designated Focal Point

DOE Designated Operational EntityDNA Designated National Authority

EIA Environmental Impact Assessment

EIT Economy in Transition (e.g. Eastern Europe)

ERU Emission Reduction Unit

EUA EU ETS allowance

EU ETS European Union Emissions Trading System

EPA US Environmental Protection Agency

ERPA Emissions Reduction Purchase AgreementFPO Forward Purchasing of OffsetsGHG Greenhouse GasGreen-e CPRE Green-e Climate Protocol for Renewable EnergyGS Gold StandardGS TAC Gold Standard Technical Advisory CommitteeGWh Gigawatt hourGWP Global warming potentialIETA International Emissions Trading Association

ICRD Independent Competition and Regulatory Commission

INCIS International Carbon Investors and ServicesIPART Independent Pricing and Regulatory Tribunal

IRP Integrated Resource Planning

ITL International Transaction Log


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JI Joint Implementation

JISC JI Supervisory CommitteeLDC Least Developed Countries

LULUCF Land use, land-use change and forestryMW Megawatt

MmtCO2e Million metric tons of CO

2equivalent

MstCO2e Million short tons of CO

2equivalent

NEM National Electricity Market

NSW GGAS New South Wales Greenhouse Gas Abatement Scheme NGAC NSW GHG Abatement CerticatesODS Ozone Depleting SubstancePDD Project Design Document

PSEG Public Service Enterprise Group

PV PhotovoltaicREC Renewable Energy CreditRGGI Regional Greenhouse Gas InitiativeRMU Removal Unit

RPS Renewable Portfolio Standard

SF6

Sulfur HexauorideSSCWG Small Scale Working GroupSTI Sustainable Travel International

TCG The Climate GroupUNDP United Nations Development Program

UNFCCC United Nations Framework Convention on Climate ChangeVCS Voluntary Carbon StandardVCS AFOLU VCS Agriculture, Forestry and Other Land UseVCU Voluntary Carbon UnitVOS Voluntary Offset StandardVER Veried Emission ReductionVERR Veried Emission Reduction/RemovalWBCSD World Business Council for Sustainable DevelopmentWEF World Economic Forum Global Greenhouse Register

WCI Western Climate InitiativeWRI World Resources Institute


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1 ContExt And PurPoSE of thIS rEvIEw

Carbon or greenhouse gas (GHG) offsets have long been promoted as an important

element of a comprehensive climate policy approach. By virtue of enablingemission reductions to occur where costs may be lower, offset projects and programscan reduce the overall cost of achieving a given emission goal, a nding supported by many economic analyses.1 Furthermore, offsets have the potential to deliversustainability co-benets, spurred through technology development and transfer, andto develop human and institutional capacity for reducing emissions in sectors and

locations not included in a cap and trade or a mandatory government policy.

With increasing attention on tackling the challenge of climate change, it is no surprisethat interest in carbon offsets is blossoming. Increasingly, individuals, organizations,and policymakers are considering carbon offsets to be a key element in their strategies

to address GHG emissions.

As experience with offset markets grows, however, a number of risks have becomemore widely apparent and caught the attention of the mainstream media.2 Most

fundamentally, offsets can pose a risk to the environmental integrity of climate actions,especially if issues surrounding additionality, permanence, leakage, quantication andverication are not adequately addressed. Depending on how offsets are used, theymay delay investment and innovation in lower-emitting technologies in key sources

and sectors of the economy (e.g. those covered by a cap and trade). They may provide

desirable near-term cost advantages, but at the risk of locking-in higher emissionsinfrastructures and higher costs in the longer term. Where the cost of implementing

offset projects is signicantly lower than the market price of offsets, as is the case formany non-carbon dioxide (CO

2) types of project (e.g. HCFC destruction projects),

offsets may be a more costly way than other mechanisms, such as direct incentives orregulation, of achieving the same reductions.

The challenge for policymakers is clear: to design offset programs and policies that

can maximize their potential benets while minimizing their potential downside risks.

Given the number and complexity of offset issues and interactions, this challenge isconsiderable.

A logical place to start is by reviewing experience with existing offset programs. Apart

from a few reviews of the voluntary carbon market (Hamilton, 2006; Trexler, 2007;Kollmuss et al., 2008), there is a general lack of publicly available reports that compileand compare the key features of the broad array of mandatory and voluntary offset

programs. Much of the available literature on offsets focuses on individual programs

or on specic aspects of the offset market, such as economic impacts, accounting

1 See e.g., EPA, 2008. Analysis of Senate Bill S.2191 in the 110th Congress, the Lieberman-WarnerClimate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf.

2 Gerald Wynn, Buyer Beware: Carbon Cuts not Always Real. Reuters, May 2 2007; and Ben Elgin,Another Inconvenient Truth. Business Week. March 26 2007.


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protocols and co-benets.3 Numerous leading actors in offset markets interviewed forthis report concurred that such a general review or resource is both currently lacking

and much needed. To ll this gap, we have designed a systematic and ongoing reviewof domestic and international offset programs. Our intended audience includes partiesinterested and involved in the development of mandatory compliance systems and of

voluntary offset programs and standards. The goal of this review is to provide an up-

to-date analysis and synthesis of the most inuential offset programs and activities,to reect on lessons learned, and thus to inform participants and designers of currentand future offset programs. Our intention is to periodically update this review tostay abreast of ongoing developments, and to develop a website portal to make thisinformation more accessible.

3 The World Banks annualState of the Carbon Market series (Capoor and Ambrosi, 2008) provides anexcellent, albeit summary, review of the broad trends and figures in the carbon market generally, and theoffsets market specifically. Some proprietary publications, such as Point Carbon, provide ongoing assess-ments of offset market activities.

Note to readers

As you review the material in this report, bear in mind that:

Reference citations are provided in two locations . Each programreview includes a reference section, which includes program-specificreferences, program websites and details of personal communications.Published documents that are cited throughout the report are included inthe reference list at the end of the document.

Program reviews are organized by program type. However, the orderof program reviews within each program type (e.g. Mandatory Cap andTrade Systems) has no implications.

Some program reviews contain more limited discussion of the les-sons learned. It is our aim to provide a consistent level of detail and

information across all program reviews; however, this is challenged by theimbalance in the published literature in favor of a select number of offsetprograms as well as the fact that experience and attention is concentratedin a handful of programs. This is especially the case for the Clean Devel-opment Mechanism (CDM), which as the most mature and dominant offsetprogram operating in the carbon market has been reviewed by many morepublications than any other program. This is reflected in the CDM programreview in this report, which has a more in-depth lessons learned sectionthan exists for any of the other programs.

Project portfolio data is limited. In this version, information on the types

and volume of projects approved or in the project pipeline is presentedonly for the CDM, Joint Implementation (JI) and the New South WalesGreenhouse Gas Reduction Scheme (NSW GGAS) programs. In futuredrafts, where information is available, we plan to provide similar tables ineach program review.


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Future versions of this review may also aim to report more extensively on lessons

learned and on the perceived strengths and weaknesses of offset program designs.

They may also include a wider array of offset programs and activities. This initial

version targets programs that meet one or more of the following criteria:

a signicant volume of credit transactions occurring or anticipated;

an established set of rules or protocols; and

path-breaking, novel or otherwise notable initiatives or important lessonslearned.

Comments and suggestions on this review, as well as on directions for potential future

versions, are encouraged and should be directed to: [email protected].


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2 rECEnt trEndS

The landscape of domestic and international project-based emission reduction or

offset programs is evolving rapidly. In 2007, the value of transactions in theglobal market for primary project-based emission reductions grew by 34% over

2006 levels to USD 8.2 billion (Capoor and Ambrosi, 2008). The market continuesto be dominated by the main offset mechanisms of the Kyoto Protocol: the CleanDevelopment Mechanism (CDM) and Joint Implementation (JI) . In 2007, the CDMaccounted for 87% of project-based transaction volumes and JI transactions doubledin volume and tripled in value over 2006 levels. European and Japanese entities werethe major buyers. The remaining market activity was split among other compliance

mechanisms and voluntary purchases (Capoor and Ambrosi, 2008). While theseprograms and players are likely to continue to dominate the global offset market for

some time, recent developments suggest that this pattern may be starting to shift,particularly in North America.

In July 2007, Alberta launched an offset system for its regulated large greenhouse gas(GHG) emitters, and in March 2008 the Canadian government launched its designfor a federal offset program. In the US, at least three states (Oregon, Washington andMassachusetts) have adopted power plant carbon dioxide (CO

2) emission requirements

that allow compliance through offsets.

The eastern states Regional Greenhouse Gas Initiative (RGGI) formally begins inJanuary 2009, and will be North Americas rst regional GHG cap and trade market.It will cover CO

2emissions from power plants in 10 northeastern US states. The

rst auction of allowances was held in September 2008. It was generally viewed asa success and allowances sold at prices above the auction reserve price. The RGGIhas established its own offset program, with highly standardized protocols for sixcategories of regional projects. It has also crafted a unique offset limit, which increasesand expands eligibility to offsets outside the region as allowance prices rise.

Also in September 2008, the Western Climate Initiative (WCI) released its design

recommendations for a regional emission trading system. Comprising seven US statesand four Canadian provinces, the WCI has a regional goal of reducing emissionsto 15% below 2005 levels by 2020. It will have the broadest coverage of any capand trade system to date, covering 90% of regional emissions by encompassing theresidential, commercial, industrial and transportation sectors in addition to electricity.It is scheduled to begin operation in January 2012, and will allow offsets to be used forup to 49% of emission reductions.

The voluntary offset market, which is targeting companies and individuals, is alsopoised for rapid expansion. Some predict that the voluntary market could rival todays


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CDM market within ve years, with over half of this activity in the US (Trexler, 2007and ICF International, 2006, as cited in Broekhoff, 2007). At the same time, the lackof common rules, transparent procedures and overall rigor in the voluntary market has

led to increasing concerns about the credibility of the offset market.

The Voluntary Carbon Standard (VCS) was launched at the end of 2007. The VCS isa base-quality voluntary offset standard that aims to unify the voluntary market andprovide basic quality assurances. The standard has very broad industry support. It willbe interesting to see if the VCS will become the main standard in the US and if it will tosome extent replace the Chicago Climate Exchange (CCX) and Green-e as voluntaryemission reduction (VER) standard providers.

Many observers think it increasingly likely that Federal legislation authorizing a

national US cap and trade system could be signed by 2010, given the support expressedfor such legislation by the incoming US President Barak Obama. Most of the climatepolicy bills submitted during the current session of Congress contained provisionsfor offsets under a cap and trade system. The most prominent of them, the AmericasClimate Security Act (the Lieberman-Warner bill), would have allowed for the useof domestic offsets to meet up to 15% of the overall emissions cap, and the use ofinternational allowances or offsets for another 15%. Such legislation could create a

market for domestic offsets in the US alone worth USD 10 to USD 20 billion per yearby 2020.4

Finally, the Bali Action Plan adopted in December 2007at the conference of the partiesto the United Nations Framework Convention on Climate Change (UNFCCC) hasincreased expectation that emission trading, and the CDM in particular, will continueto play a key role in any post-2012 international agreement (Point Carbon, 2008).

4 This is a rough estimate based on estimates of allowance prices using modeling of an early version ofthe bill by the Nicholas Institute, assuming that offsets trade for close to the estimated allowance price for2020 (USD 23/tCO

2in USD at 2005 prices), and that the allowed emissions by covered sources is roughly

5 billion tCO2e. USD 20/tCO

2times 15% times 5 billion tons equals USD 15 billion.

http://www.nicholas.duke.edu/institute/econsummary.pdf


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3 A ComPArISon of offSEt ProgrAmS

Rising concern over the threat of climate change has led to an expanding number of

mandatory and voluntary greenhouse gas (GHG) emission reduction programs andactivities, of which offsets are a common feature.

Every mandatory GHG emission trading system to date has allowed for the use of offsets by regulated entities to meet their compliance obligations. Mandatory compliance

regimes such as the Kyoto Protocol, the European Union Emission Trading Scheme(EU ETS) and, to a lesser extent, regional programs in Australia, the US and Canadahave been the principal drivers in the creation of project-based emission reduction

offsets. These regimes and programs are responsible for well over 90% of the nancialtransactions and offsets generated to date. Most of the transactions and offsets have

been generated from projects in developing countries through the Clean DevelopmentMechanism (CDM).

The design features of, and the experience and lessons learned from, the CDM arethus of central importance to participants in and designers of current and future offset

programs. Although dominant, however, the CDM is far from the only programto learn from. This report reviews the key design elements and experience of over

25 major programs and efforts to create and guide offset markets across the world:

mandatory compliance programs that drive the demand for offsets; offset creationand certication programs designed for this mandatory compliance market such asthe CDM and Joint Implementation (JI); voluntary compliance and emission tradingprograms such as Climate Leaders and the Chicago Climate Exchange (CCX); offsetproviders and funds; and offset standards and protocols such as the Voluntary CarbonStandard (VCS). As is noted above, this report aims to be relatively comprehensive inits coverage of the mandatory compliance market for GHG offsets and as up to dateas possible with respect to offset standards and protocols, but it covers only selectedoffset providers and funds because the voluntary market is vast and changes rapidly.

This section is a summary comparison of the key features of the programs reviewed in

detail in the main body of the report. Five tables compare the programs key featuresand help the reader to assess how they differ in terms of market size and scope, projecteligibility, additionality and quantication procedures, and project approval processes(program administration and authority).5 Each table is introduced with a brief overview

and comments on some of the key features. The tables list mandatory systems rst,followed by voluntary programs and retailers.

The four offset retailers were chosen to illustrate the services provided by voluntary

offset providers. Voluntary offset providers, aggregators and funds provide a varietyof services to individuals and organizations, including sourcing, aggregation (portfolio

creation) and quality assurance of offsets for individuals and business seeking to meet

5 This review and comparison builds on unpublished work prepared by Derik Broekhoff of the WorldResources Institute, which was funded by the World Economic Forum.


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their own goals and objectives. Several of these programs have been operating for over

a decade the Climate Trust, for example, was established to assist with compliancewith Oregons power plant emission regulations in 1997 but most of the offset

providers have entered the market much more recently.

There is now a little more than a decade of documented experience in offset program

design, and it is anticipated that there will be an expanding role for offsets in the designof future climate mitigation policy. Thus, the compilation of lessons learned in thisreport is a valuable opportunity to inform future offset program developments.

3.1 General features of offset programs

Table 3.1 summarizes the nature and regional scope of the selected offset programs and

gives their start dates.

Mandatory systemsMandatory systems require regulated emission sources, by national, regional orprovincial law, to achieve compliance with GHG emission reduction requirements.Offsets serve as an alternative compliance mechanism that emission sources can use tomeet these requirements. In most cases, these sources are regulated under cap and tradeemission trading regimes, such as the Regional Greenhouse Gas Initiative (RGGI) orthe EU ETS.

The two international mandatory project-based offset mechanisms established under

the Kyoto Protocol, the CDM and JI, were established in 2001 and began issuingregistered offsets in 2005. The participants in the EU ETS, the governments of theEU member states, the Japanese government and industry are the principal buyers ofCDM and JI offsets. The remaining mandatory programs that use offsets are located inNorth America and Australia. Many of these programs only recently got underway or

are still under development. A notable exception is the New South Wales GreenhouseGas Abatement Scheme (NSW GGAS), which has operated since 2003.

Voluntary systemsThe voluntary offset market includes a wide range of programs, entities, standardsand protocols. Voluntary emission reduction programs such as Climate Leaders andthe CCX set participating entities emission targets, which can partly be met throughoffsets certied through their respective protocols.

Offsets generated through voluntary markets, known as Veried or Voluntary Emissionsreductions (VERs), have been promoted as an opportunity for experimentation andinnovation. They have the general advantage of lower transaction costs than offsets

generated for use in mandatory compliance programs. However, the lack of qualitycontrol and the resulting attention attracted by substandard offset credits in thevoluntary market have generated concern from the wider offset market.


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In response, carbon market actors along with key business and environmental interestshave launched several efforts to create standards and protocols to improve the qualityand credibility of voluntary offsets. These standards and protocols differ signicantly

in their goals and the services provided. At one end are complete standards that provide rules and administrative bodies for accounting, quantication, monitoring,verication, certication and, in some cases, registration of offsets. These fullerstandards, which include the Gold Standard and the VCS, among others, tend to buildon existing rules and procedures in compliance markets, most notably the CDM. Thesestandards are designed to provide offset providers with quality assurance certicationfor their products and offset consumers with greater transparency and condence in thecredibility and integrity of certied offsets.

At the other end are offset protocols which are more limited in scope, such as the

International Organization for Standardization (ISO) standard 14064 and the GHGProtocol for Project Accounting. Such protocols provide common denitions,accounting frameworks and quantication options that can be adopted or adapted byindividual offset programs or standards. In this sense, these protocols can be viewedas building blocks for standard and program development. For example, the VCS hasadopted ISO-14064 for its accounting procedures.

There are other institutions, standards, and criteria that provide a mix of services fordesigning, screening, certifying or registering offsets. The California Climate ActionRegistry (CCAR), which is increasing its focus on offsets, provides a project registryand has developed selected quantication protocols for selected project types. TheGreen-e Climate Program audits and certies carbon offset retailers and ensures thattheir marketing claims are truthful. Other standards, such as the Climate, Communityand Biodiversity Standards (not discussed here) provide design criteria to ensure

robust project design and, particularly in this case, local community and biodiversitybenets.

The proliferation of standards, protocols and other programs reects the signicantux and experimentation in todays voluntary offset market. Some consolidation of

standards is likely to occur in future years. At the same time, because of the differingobjectives of many voluntary market participants, especially with respect to the localimpacts and benets of offset projects, multiple standards and screens are likely toremain lasting features of the voluntary market.


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Table3.1:Generalfeaturesofoffsetprograms6

Nameofp

rogram

Re

gionalscope

Typeofprogram

Startofprogram

InternationalOffsetMechanisms

CleanDevelopmentMechanism(CDM)

International(coversallcountries

tha

thaveratifiedtheKyotoProtocol)

Project-basedoffsetmechanismunderthe

KyotoProtocol

Generalrulesestab

lishedin

2001,firstoffsetissuedin

2005

JointImplementation(JI)

An

nex-1partiestotheKyotoProtocol

Project-basedoffsetmechanismunderthe

KyotoProtocol

Generalrulesestab

lishedin

2001.

Mandatory

CapandTradeSystems(OffsetFeatures)

AustraliaN

ationalEmissionsTrading

System

Au

stralia

Underdevelopment.Nationalcap

andtrade

systemproposedwithoffsetsaspotential

compliancemechanism.

Designexpectedbyendof

2008.Startexpecte

dby2010.

CanadasO

ffsetSystemforGreenhouse

Gases

Ca

nada

Underdevelopment.Nationalem

ission

intensitytargetswithoffsetsaspro

posed

compliancemechanism

Rulesexpectedin2

008

NewSouth

WalesGreenhouseGas

Abatement

Scheme(NSW

GGAS)

NS

W,Australia

Statepercapita-basedcapandtrade

systemwithoffsetsasunlimitedco

mpliance

mechanism

StartedinJanuary2003

RegionalG

reenhouseGasInitiative

(RGGI)

No

rtheastUSstates:CT,DE,ME,

NH

,NJ,NY,VT,MA,RI,andMD

Regionalcapandtradewithoffse

tsaslimited

compliancemechanism

Startsin2009.

WesternClimateInitiative(WCI)

We

sternstates(AZ,CA,MT,NM,

OR,UT,andWA)andCanadian

provinces(BC,MB)

Underdevelopment.Regionalcap

andtrade

systemwithoffsetsaspotentialcompliance

mechanism

Startsin2012

6

Allsourc

esarecitedinthespecificprogramreviewsections.


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Nameofp

rogram

Re

gionalscope

Typeofprogram

Startofprogram

OtherMan

datorySystems(OffsetFeatures)

AlbertaOffsetSystem

Ca

nadianprovinceofAlberta

Provincialintensity-basedemissionregulations

allowforunlimitedoffsetsasaco

mpliance

option

StartedinJuly2007

Statepowerplantrules(OR,WA,MA)

Oregon

Wa

shington

Ma

ssachusetts

OR/WA:Legislatedemissionstandard

MA:Statecapwithoffsetsaslimited

compliancemechanism

OR:Startedin1997

WA:Startedin200

3

MA:Startedin200

6

CarbonFin

anceFunds

WorldBankCarbonFinanceFunds

International

OffsetFund

Establishedin1999

VoluntaryC

apandTradeSystems(OffsetFeatu

res)

ChicagoClimateExchange(CCX)

OriginallyonlyintheUSbuthas

beenexpanded.International

me

mbershipnowpossible.

Voluntarycompliancecapandtra

dewith

offsetsasunlimitedcompliancem

echanism

Launchedin2002

VoluntaryG

HGReductionPrograms

ClimateLeaders

PrimarilyUS

Voluntarycomplianceprogramwithoffsetsas

unlimitedcompliancemechanism.

Launchedin2002.

Offset

programunderdevelopment.

CaliforniaClimateActionRegistry

(CCAR)

US

(mainlyCalifornia)

GHGregistry

Activesince2002

VoluntaryG

HGAccountingProtocols

WBCSD/WRIGHGProtocolforProject

Accounting

No

tdefined

Offsetstandardprotocol

Publishedin2005

ISO14064

No

tdefined

Voluntaryprotocolandprojectsta

ndard

Launchedin2006


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Nameofp

rogram

Re

gionalscope

Typeofprogram

Startofprogram

VoluntaryS

tandardsforOffsetProjectsandRetailers

GoldStand

ard(GS)

International

Carbonoffsetstandard

Launchedin2003

VoluntaryO

ffsetStandard(VOS)

International

Carbonoffsetscreen

Launchedin2007

VoluntaryC

arbonStandard2007(VCS

2007)

International

Offsetstandard

Launchedin2007.

Version1

launchedin2006.

Green-eClimateProtocolforRenewable

Energy

US

VoluntaryGHGprotocol

Launchedin2007

Green-eClimateProgram

US

focus/International

Voluntarycertificationprogram

Launchedin2007

VoluntaryO

ffsetRetailers

ClimateTru

st

US

Retail/BulkOffsetProvider

Foundedin1997

TerraPass

No

rthAmerica

RetailOffsetProvider

Foundedin2004

NativeEnergy

US


Foundedin2000

Myclimate

International


Establishedin2002


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3.2 Market size and scope

Offset markets are growing rapidly and increasing in signicance. From 2005 to 2007

alone, the transaction value of the global market for primary and secondary project-based emission reductions grew by 470% from USD 2.9 to USD 13.6 billion (Capoorand Ambrosi, 2007 and 2008).7 The market continues to be dominated by the mainoffset mechanisms of the Kyoto Protocol the CDM and the JI. In 2007, the CDMaccounted for 87% of project-based transaction volumes and JI transactions doubled involume and tripled in value over their 2006 levels, with European and Japanese entitiesas the major buyers. The remaining market activity split among other compliance

mechanisms and voluntary purchases (Capoor and Ambrosi, 2008).

The Executive Secretary of the United Nations Framework Convention on Climate

Change (UNFCCC), Yvo de Boer, has stated that the CDM could become a USD 100billion per year market.8 On the other hand, if and when project types, sectors andcountries become increasingly covered by emission caps or other regulations, themarket for offsets could begin to decline as allowance allocation and trading or other

policy instruments take on a greater role. Thus, the ultimate fate of the offset market isfar from clear. It will depend on the role policymakers assign to offsets in an efcient,equitable and effective policy regime that comprehensively addresses the climatechange challenge.

Table 3.2 compares the market size and the scope of various offset programs and

providers, to the extent that information could be compiled. Compiling estimates of thesize or volume of the offset market is challenging because metrics vary and information

is often proprietary, especially within the voluntary market. The different metrics canbe especially confusing. Some gures for offset market activity represent total offsettransactions in a given year, including both primary (by original offset providers) andsecondary (resold offsets) transactions, some are for primary transactions alone, whileothers represent the total offsets registered or certied (which may include expectedoffsets generated in future years) or issued during a given year. The resulting estimates

of the size of the CDM market can thus vary by as much as an order of magnitude.

For example, slightly over 100 million Certied Emission Reductions (CERs) havebeen issued to date, while other gures refer to the 1.2 to 2.6 billion CERs registeredand in the pipeline, that is, that could be issued cumulatively by 2012 if projectsregistered, and those under development, yield credits as expected. Readers shouldthus view market size estimates with caution, and with careful attention to preciselywhat is being counted.9

7 A primary transaction occurs between the original owner (or issuer) of the Carbon asset and a buyer(Capoor and Ambrosi, 2007). A secondary transaction occurs where the seller is not the original owner (orissuer) of the Carbon asset (Capoor and Ambrosi, 2007).

8 UNFCCC Press Release, September 19 2006

9 Those interested in more detailed and up-to-date assessments should consult market analyst publica-tions such as those produced by Point Carbon, New Carbon Finance and Ecosystem Marketplace; as wellas the annual State of the Carbon Market review published by the World Bank.


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Compliance (mandatory) marketsOnly offsets generated from the CDM and JI project-based mechanisms are eligiblefor compliance under the EU ETS and for compliance with the Kyoto Protocol, which

makes such offsets by far the largest component of the compliance offset market.Demand from the EU ETS, as the largest mandatory cap and trade system, hasdominated the purchasing of offsets in recent years. These account for almost 90% ofCDM and JI purchases to date. The Japanese government and private entities are theother signicant buyers (Capoor and Ambrosi, 2008).

Outside of the Kyoto Protocol instruments (the CDM and JI), the NSW GGAS is thesecond largest offset market. As of February 29 2008, nearly 63.3million metric tons(Mmt) oftCO

2e in offset credits had been created under the program (NSW GGAS,

2008).

Voluntary marketsEstimates of the size of the voluntary offset market vary widely and sales information

from retail offset providers can be difcult to track. According to Hamilton, during2006 voluntary offset market transactions totalled 23.7Mmt of CO

2e (see Figure

1.1). Transactions through the CCX account for 10.3MmtCO2e, and the remaining

13.4MmtCO2e was transacted through the voluntary offset providers, retailers and

purchasers surveyed by Hamilton et al. (2007). These values may be conservative because of the lack of complete reporting. On the other hand they may includesome double counting of offsets because they include surveys of both providers and

purchasers. Individuals, organizations and businesses in the US dominate voluntaryoffset purchases. Almost 60% of global voluntary offset market transactions werein the US in the rst three quarters of 2007, with transactions as part of the CCXaccounting for close to half of the US volume (Point Carbon, 2007c).

Offset pricesOffset prices tend to vary based on the project type, its location, the market demandand the stringency of the offset program requirements. Offset prices in the compliancemarket are driven primarily by the supply of and demand for offsets and allowances.

Demand drives prices for offsets. It is therefore not surprising that offsets for themandatory market fetch considerably higher prices than voluntary offsets.. This is

most apparent when comparing the price of CDM offset credits to those available onthe voluntary offset market, as is shown in Table 3.2.

These price estimates should be viewed with caution, since they represent only a briefsnapshot of an often volatile market. Nonetheless, they illustrate that prices vary byan order of magnitude depending on the program, its requirements and, perhaps mostimportantly, the markets in which the offsets are sold. For example, prices for CDMand JI offsets are linked to the broader markets for EU ETS and Kyoto allowances.

Depending on the extent to which delivery of CERs and emission reduction units(ERUs) is guaranteed, they can garner upwards of 80% of the trading price of EUallowances. Even though in principle CERs, ERUs, and EU allowances are fullyfungible, countries have supplementarity limits on the amount of CERs and ERUs


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they can purchase to meet their compliance obligation. To the extent that these limits

are expected to be binding, and thus that the supply of CERs and ERUs is expected toexceed allowable demand under the supplementarity limits, CERs and ERUs will trade

for prices lower than allowances. It is not clear whether this will occur in the periodto 2012.

Prices for voluntary offset credits vary signicantly based on the standards used,project types, project locations, offset quality, delivery guarantees and contract terms.Of the ve offset retailers reviewed in this report, the price per metric ton ranges fromUSD1112 for the US-based Climate Trust, TerraPass and NativeEnergy projects,up to USD 35 for the Gold Standard CERs and VERs sold through myclimate. Noclear connection has been found between the offset sale price of non-prot vs. for-prot retailers (Kollmuss and Bowell, 2007). No readily available metrics currentlyexist for consumers to determine either how the price of offset credits sold in the

voluntary market is determined, or the role the offset price has on the quality of theoffset purchased.


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Table3.2:Marketsizeandscope(estimatesasofJuly2008ormostrece

ntdateavailable)

Nameofp

rogram

Tradableunit

nameand

acronym

Participants/buyers

Unitof

measurement

ERstodate

(MmtCO2e)*

Projected

ERsby2012

(MmtCO2e)*

Indicativeprices

(USD/metr

ictonin

early2008

unless

noted)


CleanDevelopment

Mechanism

(CDM)

CertifiedEmissions

Reduction(CER

)

Publicandprivateentities

withinthejurisdictionof

KyotoProtocolmember

countries;otherentities

mayuse/retirethem

undervoluntaryoffset

programs

metric

170

12001400

CERsissued

Primaryma

rketUSD

23USD2

4(EUR

14.50-EUR15)

Secondarymarket:

USD35(EU

R22)


Emissions

ReductionUnit

(ERU)

SameasCDM

metric

N/A

180280

N/A

Mandatory


AustraliaN

ational

EmissionsT

radingSystem

Under

development

Underdevelopment.

Expectedtobe

complianceentitiesinthe

nation

metric

n.d.

n.d.

n.d.

CanadasO

ffsetSystemfor

Greenhous

eGases

Under

development

Complianceentitiesinthe

nation

metric

n.d.

n.d.

n.d.

NewSouth

Wales

Greenhous

eGas

Abatement

Scheme(NSW

GGAS)

NSW

GHG

Abatement

Certificates

Complianceandelective

entitiesinthestate

metric

68

n.d.

USD4(Sep

t.2007)

RegionalG

reenhouseGas

Initiative(RGGI)

CO2Offset

Allowances


region

short

n.d.

n.d.

n.d.


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Nameofp

rogram

Tradableunit

nameand

acronym

Participants/buyers

Unitof

measurement

ERstodate

(MmtCO2e)*

Projected

ERsby2012

(MmtCO2e)*

Indicativeprices

(USD/metr

ictonin

early2008

unless

noted)

WesternClimateInitiative

(WCI)

Under

development

Underdevelopment.

Expectedtobe

complianceentitiesinthe

region

Notyetspecified

n.d.

n.d.

n.d.

OtherMan


AlbertaOffsetSystem

Alberta-based

offsetcredit


province

metric

1.5

n.d.

n.d.

Statepowerplantrules(OR,

WA,MA)

Oregon:CO2

offsets

Washington:

Carboncredits

Massachusetts:

GHGCredits

Complianceentitiesin

thestate

short

Oregon:1.5

n.d.

Oregon:USD1.40

Washington

:USD1.60

Massachusetts:USD5

CarbonFin

anceFunds

WorldBankCarbon

FinanceFunds

CERandERU

Governmentagencies

andprivatesector

companies

metric

6.9

300

n.d.

VoluntaryC


res)

ChicagoClimateExchange

(CCX)

CarbonFinancial

Investments(CF

I)#

CCXmembersandnon-

memberssuchasoffset

brokers

metric

44

n.d.

USD2-8


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Nameofp

rogram

Tradableunit

nameand

acronym

Participants/buyers

Unitof

measurement

ERstodate

(MmtCO2e)*

Projected

ERsby2012

(MmtCO2e)*

Indicativeprices

(USD/metr

ictonin

early2008

unless

noted)

VoluntaryG

HGReductionPrograms

ClimateLeaders

ExternalGHG

reductions

ClimateLeaderspartners

short

n.d.

n.d.

N/A

CaliforniaClimateAction

Registry(CCAR)

N/A

N/A

metric

N/A

N/A

N/A

VoluntaryG


WBCSD/WRIGHGProtocol

forProjectAccounting

N/A

N/A

N/A

N/A

N/A

N/A

ISO14064

N/A

N/A

N/A

N/A

N/A

N/A

VoluntaryS


GoldStand

ard(GS)

GSCERandGS

VER

Offsetretailers,providers,

individuals,organizations

andbusinesses

metric

0.7

n.d.

Averageprice

premium

GSVERs:20100%

abovecomparable

VERs

GSCERs:5

25%

aboveregularCERs

VoluntaryO

ffsetStandard

(VOS)

VerifiedEmissio

ns

Reduction(VER)

Largemultinational

financialinstitutions

metric

n.d.

n.d.

n.d.

VoluntaryC

arbonStandard

2007(VCS2007)

VoluntaryCarbon

Unit

Voluntaryoffset

retailersandproviders,


andbusinesses.

metric

n.d.

1020

USD824(VCS

version1)


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Nameofp

rogram

Tradableunit

nameand

acronym

Participants/buyers

Unitof

measurement

ERstodate

(MmtCO2e)*

Projected

ERsby2012

(MmtCO2e)*

Indicativeprices

(USD/metr

ictonin

early2008

unless

noted)

Green-eClimateProtocol

forRenewa

bleEnergy

VER

Offsetretailers,


andbusinesses

metric

n.d.

n.d.

n.d.


VERandCER

Carbonoffsetretailers

(variesby

program

certified)

n.d.

n.d.

Variesbyoffsetretailer

VoluntaryO

ffsetRetailers

ClimateTru

st

VER

Individuals,organizations

andbusinesses

Complianceentitiesunder

theOregonstatepower

plantrule

metric

2.6

n.d.

USD12

TerraPass

VER


andbusinesses

pounds

0.5

n.d.

USD13

NativeEnergy

VER


andbusinesses

short

n.d.

n.d.

USD11

Myclimate

CERandVER


andbusinesses

metric

0.1

n.d.

USD36-107

*Valuesinthesecolumnsareestimatesofcumulativ

eERsgenerated.Refertosectionfordiscussion.Estimatesmaynotbefullycomparable.

n.d.:Nodata

readilyavailable;N/A:notapplicable

Indicativepr

icesarefrom2008andaredrawnfromawiderangeofsources;pricesmay

fluctuatesignificantly,especiallythose

linkedtotradingmarkets.Pricesarer

oundedtothe

nearestUSdo

llar,andwherebasedoneurosreflect

anexchangerateofEUR1=USD1.54(http://www.federalreserve.gov/rele

ases/h10/update/accessedonMarch

212008)

#Unitsaredenominatedin100metrictonsofCO2


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3.3 Offset project eligibility

Table 3.3 shows offset eligibility requirements for each offset system or program. These

requirements reect the specic context and objectives of each system. Design featuresare commonly added to limit offset projects to a particular location or project type in

order to direct offset investments to favored regions, project types or technologies.Some offset programs and standards also include environmental and social objectives

as project eligibility criteria.

In general, offset programs tend to focus on either encouraging regional investmentor supporting sustainable development and providing nancial ows to developingeconomies. While sustainable development and technology transfer to developing

countries was an explicit design goal of the CDM and the Kyoto Protocol, many of theregional and provincial mandatory compliance programs outside the Kyoto Protocol

prefer to maintain benets and build support through investment in local or regionalcommunities and enterprises.

Project locationTable 3.3 shows the eligible project locations but not the distribution of offset project

activities to date under each program. The distribution of project locations and project

types reects not only where market opportunities lie (e.g. the supply of low-costemission reductions), but also the capacity of national and local institutions to engagein the offset market, as well as the transaction costs and other barrier they may face.For instance, in the CDM over 73% of offset project transactions in 2007 were forprojects located in China, but only 6% in India, 11% in Latin America, 5% in Africaand 5% in the rest of Asia (Capoor and Ambrosi, 2008). China possesses abundantlow-cost opportunities to reduce the emission of so-called high global warming impact

industrial gas, in particular HFC-23 and N20 produced as the unwanted by-products

of refrigerant and chemical manufacturing, respectively. As is illustrated in Figure 3.1,industrial gas projects represented nearly half of the CDM offsets sold in 2006. Chinaalso has an increasingly well-developed infrastructure for developing and approving

offset projects.

In the voluntary market, 39% of all offsets sold in 2007 originated from projects locatedin Asia and 27% from projects located in North America (Hamilton, 2008).

Issues with Renewable Energy Credits

In the voluntary carbon offset market, Renewable Energy Credits (RECs),generated through the production of renewable energy, are increasingly beingconverted to and sold as carbon-offset equivalents. This practice has beenhighly controversial because of concerns raised regarding the additionality

and ownership of converted RECs (Gillenwater, 2007.) For further discussionon the use of RECs see section 10.6 section 11.4.


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Figure 3.1: Offset project types and transaction volumes in 2006

(Sce: Cap a Absi, 2007; hai, 2007)

Kyoto Projects (CDM and JI)

Total Volume in 2006: 466 MmtCO2e

Voluntary Offset Projects (CDM and JI)

Total Volume in 2006: 13 MmtCO2e (Excluding CCX transactions of 10.3 MmtCO

2e)


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Project typeAfter industrial gas projects, renewable energy has been the second largest projecttype in the CDM, followed by a variety of methane capture and combustion activities

ranging from landlls to coal mines and livestock management (see Figure 3.1).Much less common offset project types include), among others, energy efciency andbiological carbon sequestration ranging from forestry and agricultural activities toavoided land use change.

In contrast, Figure 3.1 shows that forestry carbon sequestration projects, closelyfollowed by renewable energy projects together accounted for about two-thirds of

the voluntary carbon market in 2006 outside of the CCX. Thus far, agricultural soilmanagement projects (e.g. no till practices) have dominated the CCX offset projectportfolio.

Bottom-up or top-down approachesIn addition to the relative cost of implementing projects, the availability of program-approved methodologies for quantifying emission reductions or removals is a keydeterminant of the mix of project types in the market today. In general, offset programshave developed two different approaches to determining offset project-type eligibility.

At one end is the bottom-up approach used under the CDM, where project types areconsidered, as submitted by the project developers, and approved if deemed adequateby the administrative body or program authority (CDM Executive Board, CDM EB).At the other end is a top-down approach, such as that taken by RGGI which spelled outin its Memorandum Of Understanding and Model Rule precisely which project typeswould be eligible, and which methodologies applicable, from the outset of the project(although other project types would be considered).

Project start dateThe project start dates listed in Table 3.3 refer to the cut-off date for project

commencement. In principle, a project type that has commenced prior to the startdate would be considered ineligible, although precise denitions of start-up varyamong programs. The typical rationale for setting a start date is to help to ensure that

offset programs actually lead to a project happening, that is, that they are additional.Therefore, the project start date is generally linked to the timing of the launch of theoverall offset program. The start dates of some programs, such as the CCX, predatethe start of the offset program launch and reect the grandfathering of offset creditscreated through other certication programs (e.g., RECs).


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Table3.3:Offsetprojecteligibility

Nameofp

rogram

Eligibleprojectloc

ations

Eligibleprojecttypes

Projectstart

date


CleanDevelopment

Mechanism

(CDM)

Developing(non-An

nex1)countrieswhere

DesignatedNationa

lAuthorities(DNAs)are

established

Allelig

ibleexceptnuclearenergy,newHCFC-22facilitiesor

avoideddeforestation

January120

00

JointImplementation

(JI)

Annex1countriesth

ataresignatoriestothe

KyotoProtocolwithcappedemissions

SameasCDMexceptland-use,land-usechangeandforestry

(LULUC

F)projects,whicharenotlimitedto

justafforestation

andreforestationproject

January120

00

Mandatory


AustraliaN

ational

EmissionsT

rading

System

Underdevelopment.

Designrecommendationsincludeboth

domesticandinternationaloffsetprojects.

Under

development.

Design

recommendationshaveprioritizedthefollowing

project

types:landuse,forestry,woodprod

ucts,avoided

deforestationandcarbongeosequestration

Underdevelo

pment

CanadasO

ffset

SystemforGreenhouse

Gases

Underdevelopment

Under

development

Underdevelo

pment

NewSouth

Wales

Greenhous

eGas

Abatement

Scheme

(NSW

GGA

S)

WithinNewSouthW

alesonly,exceptfor

electricitygeneration

projectswhichcan

bewithintheAustralianNationalElectricity

Market.

Add

itionalelectricityfromlowemissio

nsources

(includinguseofRECsascompliance

units)

Supplysideenergyefficiencyatexistin

gpowerstations

Dem

andsideenergyefficiency

Indu

strialon-siteemissionreductions

Fore

stcarbonsequestration(afforesta

tionor

reforestation)

Electricitygeneration:

January120

03

Demandside

management:January

12002inNSW

and

January120

04inthe

ACT

Carbonsequ

estration:

January120

03


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Nameofp

rogram

Eligibleprojectloc

ations


Projectstart

date

RegionalG

reenhouse

GasInitiative(RGGI)

WithinRGGIparticipatingstatesorother

approvedjurisdictions

Ifemissionallowanc

esexceedtheStage2

triggerprice(USD1

0),theeligibleproject

locationsisexpande

dtoincludeoffsetsfrom

anygovernmentalm

andatoryprogram

outsidetheUSwithatonnagelimitonGHG

emissions.

Landfillmethanecaptureanddestruction;

Reductioninemissionofsulfurhexafluoride(SF

6);

Sequestrationofcarbonduetoafforestation;

Avoided/reducednaturalgasoroilco

mbustiondueto

end

useenergyefficiencyinthebuildingsector;

Agriculturalmanuremanagementoperations;

Con

tinueddevelopmentofadditional

eligibleproject

type

sexpected

December202005

WesternClimate

Initiative(W

CI)

WCIapprovedandcertifiedoffsetsfrom

projectsintheUS,C

anada,andMexico;

and,

CDMoffsets,perhapssubjecttoadded

criteriaorstandards

Under

development.Prioritiesforprotocol

investigationand

developmentinclude:

Agriculture(soilsequestrationandma

nure

man

agement);

Fore

stry(afforestation/reforestation,forest

man

agement,forestpreservation/con

servation,forest

prod

ucts);and

Was

temanagement(landfillgasand

wastewater

man

agement).

Underdevelo

pment

OtherMan


AlbertaOffsetSystem

Albertaonly

AllprojecttypeswithapprovalbyAlbertaE

nvironment.

January120

02

Statepowerplantrules

(OR,WA,M

A)

Oregon:Anylocatio

n

Washington:Notspecified

Massachusetts:Limitedto10Northeast

states(CT,DE,ME,MA,MD,NH,NJ,NY,VT)

andUSCoastalWaters.Boundaryexpanded

toanylocationifoff

settriggerpriceis

exceeded.

ORorWA:nolimitationsorspecifications

MA:An

yexceptnuclearpowergeneration,

underwaterand

underg

roundsequestration.

ORandWA:

no

limitations

MA:January

12006


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Nameofp

rogram

Eligibleprojectloc

ations


Projectstart

date

CarbonFin

anceFunds

WorldBankCarbon

FinanceFunds

Nolimitations.Requ

irementsvarybyfund.

CDM/J

Irequirementsapply.Additionallim

itationsvaryby

fund.

CDM/JIrequ

irements

apply

VoluntaryC


res)

ChicagoClimate

Exchange(CCX)

AnycountryexceptE

uropeanUnionEmission

TradingSchememembercountriesorAnnex

1countriesthatare

signatoriestotheKyoto

Protocol

Energy

efficiencyandfuelswitching,coalm

inemethane,

agriculturalmethane,agriculturalsoilcarb

on,rangelandsoil

carbon

,forestrycarbon,landfillmethane,ozonedepleting

substance(ODS)destructionandrenewableenergy.

January119

99

Forestryprojects:

January119

90

ODSprojects:January

12007

VoluntaryG

HGReductionPrograms

ClimateLeaders

US

Curren

teligibleprojects:

landfill

methanecollectionandcombustion

manuremanagement(dairyorswine)

transitbussystems

industrialandcommercialboilers

affores

tation/reforestationprojects

Additio

nalprojecttypeseligiblewithprotoc

olapprovalbyUS

Environ

mentalProtectionAgency(EPA).

Underdevelo

pment

CaliforniaClimate

ActionRegistry(CCAR)

US

Curren

teligibleprojects:

affores

tation

conservation-basedforestmanagement

refores

tation

livestoc

kandlandfillmethanecapture

Carbonsequ

estration:

January119

90

Methanecap

ture:

January120

01


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Nameofp

rogram

Eligibleprojectloc

ations


Projectstart

date

VoluntaryG


WBCSD/WRIGHG

ProtocolforProject

Accounting

Notdefined

Project

guidancecanbeappliedtoanypro

jecttype.Specific

guidelineshavebeendevelopedforgrid-connectedelectricity

andLU

LUCFprojects.

Notdefined

ISO

14064

Notedefined

Notde

fined

Notdefined

VoluntaryS


GoldStand

ard(GS)

Alllocations,except

incountrieswith

emissioncapsunlessGoldStandard(GS)

VerifiedEmissionRe

ductions(VERs)are

backedbypermane

ntlyretiringassigned

amountunits(AAUs)

Renewableenergyandenergyefficiencyprojects.Excludes

hydrop

owerlargerthan15MW

January120

06

VoluntaryO

ffset

Standard(V

OS)

Alllocations,except

incountrieswith

emissioncapsunlessGSVERsarebackedby

permanentlyretiring

AAUs

CDM/J

Irequirementsapply.Additionalexc

eptionsinclude

HFCandlargehydropowerprojects.

CDM/JIrequ

irements

apply

VoluntaryC

arbon

Standard2

007(VCS

2007)

Alllocations,except

incountrieswith

emissioncapsunlessvoluntarycarbonunits

(VCUs)arebackedbypermanentlyretiring

AAUs.

AllprojecttypeseligiblewithVCSapprovedmethodology,

except

projectsfromnewindustrialgasfacilities

January120

02

Futurerestrictions:Start

datemustbe

within2

yearsofvalid

ationdate.

Green-eClimate

ProtocolforRenewable

Energy

US

Renewableenergyprojects:

wind,s

olar,hydropower(upto5MW;additional

specific

ations),geothermal,methanecaptu

re,oceanthermal

wavea

ndtidalenergy

Newprojecttypesevaluatedoncase-by-ca

sebasis

January120

05


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Nameofp

rogram

Eligibleprojectloc

ations


Projectstart

date

Green-eClimate

Program

Specifiedbyapplica

bleoffsetstandard

CDMs

tandardrequirementsexceptLULUC

Fandhydropower

>10M

W

excluded

AllVCS

2007excepthydropower>10MW

andadditional

nativespeciesrequirementforcarbonsequ

estrationprojects

January120

00

VoluntaryO

ffsetRetailers

ClimateTru

st

USandInternationa

l

Nolimitations

Afterdateof

project

approvalwiththe

ClimateTrust

TerraPass

US


windenergy

methanecapture

seeCCXand

VCS

NativeEnergy

US


windenergy

solarenergy

methanecapture

N/A

Myclimate

Non-Annex1countriesorSwitzerland

Renewableenergyandenergyefficiencyprojects

seeGoldStandard


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3.4 Additionality and quantification procedures

Table 3.4 shows the different approaches to additionality assessment and quantication

procedures across various offset programs. These are described further below. First,some of the key terminology as well as some of the key elements of additionality and

baseline evaluation are reviewed.

The design elements most fundamental to ensuring that offset projects are real andquantiable have also been the most contentious. In theory, additionality answersa very simple question: Would the activity have occurred, holding all else constant,if the activity were not implemented as an offset project? In practice, however,determining whether an offset is real through additionality requirements presents asignicant design challenge. Quantication of an offset projects GHG benets relies

on the development of a baseline scenario, a hypotheticalscenario of emissions thatwould have occurred had the activity notbeen implemented as an offset project. By

denition, this baseline scenario will never occur; instead, the offset credits generatedfrom a project are quantied with incomplete certainty based on the difference inemissions between the offset project and the baseline scenario.

Offset programs and providers differ in their overall approaches to additionalityand quantication procedures. Top-down programs tend to provide specic detailedaccounting rules upfront, while bottom-up programs tend to offer only generalguidelines for project GHG accounting and instead evaluate projects on a case-by-casebasis.

Project-based versus standardized additionality testingThere are two broad design approaches to evaluating additionality and the closely

linked process of determining baselines: project-specic and standardized (often

called performance standards). The project-specic approach involves the evaluationof individual projects based on one or more additionality tests. These project-specicadditionality tests are commonly based on the CDM additionality tool (See CDMAdditionality Tool Text Box), which evaluates whether the offset project is dependent

on offset project revenue ( investment test) or whether it has overcome signicantimplementation barriers ( barriers test). In addition, the CDM tool requires that thetechnology or practice used by the project must not be in common use ( commonpractice test). Most programs also require projects to be regulatory surplus, that is,that they exceed existing legal requirements.

Due in part to concerns regarding the partly subjective nature of some project-based

methods, several offset programs and protocols incorporate or rely exclusively onstandardized methods to assess additionality. Standardized methods include, amongothers, performance thresholds (emission rates or other characteristics dened based

on similar activities) and clearly dened common practice tests (e.g. lower thana specied level of market penetration for similar activities). Climate Leaders, theCCAR, the CCX, RGGI and the NSW GGAS are among the programs and protocols


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that rely more heavily on standardized approaches. The GHG Protocol for ProjectAccounting and International Organization for Standardization (ISO) 14064 standardsprovide guidelines for both approaches..

Baselines and quantification proceduresOffset programs also differ signicantly in how emission reductions or removals arequantied for individual offset projects. The expansion of offset programs in recentyears has led to a proliferation of baseline and monitoring quantication protocols,which are now far too abundant for them all to be described in detail here. For

example, the CDM includes over 70 approved methodologies for different projecttypes. Table 3.4 therefore focuses on the process by which quantication protocolsare developed. Approved methodologies include project-specic baselines developedfrom the bottom up by project participants and developers, the performance standardapproach developed from the top down by program administrators and authorities or

some hybrid of the two. Programs designed to accommodate an expanding set of offset

project technologies have tended to opt for a bottom-up approach, the CDM being theclassic example. Others, such as RGGI, have incorporated a signicant body of existingwork on protocol developments, and have opted for a more top-down prescriptiveapproach. Both top-down and bottom-up programs vary in their use of project-specicor performance standard approaches to determining baselines.

Investment analysis

Revenue from the carbon offsetsmust be a primary driver forproject implementation;

or

Barriers Analysis

Project implementation mustrequire the ability to exceedimplementation barriers, such aslocal resistance, lack of know-how, and institutional barriers;

and

Common practice analysis

Projects must employ technologythat is not very commonly used.

Flowchart of the CDM Additionality Tool version 4

CDM additionality tool

Sce: unfCCC (2004), EB-36rep, Ae 13


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Table3.4:AdditionalityandQuantificationProcedures

Nameofp

rogram

Add

itionalityandrelatedrequiremen

ts

Quantification(baseline/monitoring)p

rotocols


CleanDevelopmentMechanism

(CDM)

CDM

additionalitytool

Step

1:Identificationofalternativestoth

eprojectactivity

cons

istentwithmandatorylawsandregu

lations

Step

2:Investmentanalysisor

Step

3:Barrieranalysis,

Step

4:Commonpracticeanalysis,

Steps1,4andeither2or3aremustbe

fulfilled

Baselinesdefinedbymethodologies(proposedby

projectproponents,reviewedbyMethodol

ogyPanel),

manyusingstandardizedequations,some

basedon

project-specificparameters.

Nosta

ndardizedprotocolformonitoring.Monitoring

isdoneinaccordancewiththeprocesslaidoutinthe

registe

redProjectDesignDocument(PDD)

.


Eithe

rthesameasCDMrequirements,o

r

Dem

onstrateuseofconservativeassump

tions

Base

doncomparabilityoftheprojectwithanotherAccredited

IndependentEntitydetermined(registere

d)project

CDMrequirementsapply

Mandatory


AustraliaN

ationalEmissionsTrading

System

Underdevelopment

Under

development

CanadasO

ffsetSystemfor

Greenhous

eGases

Underdevelopment.ExpectedtobebasedonISO

14064.

Under

development

NewSouth

WalesGreenhouseGas

Abatement

Scheme(NSW

GGAS)

Base

donpositivetechnologylistandestablishedbaseline

scen

arios

Explicitrulesandinstructionsforbaseline

quantificationprovidedinGHGBenchmarkRulesfor

eachtypeofprojectactivity.Monitoringrequirements

areou

tlinedbytheprogramadministrator

andinthe

GGAS

regulationrequirements.

RegionalG

reenhouseGasInitiative

(RGGI)

Regu

latorysurplustest

Noc

reditsforelectricgenerationwithinRGGI

Nof

undingfromanysystemorcustomerbenefitfund

Noc

reditsorallowancesawardedunderanyothermandatoryor

voluntaryGHGprogram.

Baselineandmonitoringprotocolsareout

linedin

detailforeacheligibleoffsetprojecttypeintheRGGI

Model

Rule.


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Nameofp

rogram

Add


ts


rotocols


Underdevelopment

Under

development

OtherMan


AlbertaOffsetSystem

Regu

latorysurplustest

Real

(specificandidentifiableactionstha

treduceorremove

GHG

s)

Dem

onstrable(demonstrateanetreductioninGHGs)

Qua

ntifiable

Quantificationprotocolsaredevelopedby

Alberta

Environmentorproposedbyprojectdevelopersand

reviewedandapprovedbyAlbertaEnviron

ment

Statepowerplantrules(OR,WA,MA)

Regu

latorysurplustest(ORandMAonly

)

Offsetsmustbereal

ORan

dMA:Regulationprovidesguidancefor

requireddocumentationforquantification.

WA:noguidelines

CarbonFin

anceFunds

WorldBankCarbonFinanceFunds

CDM

/GoldStandardrequirementsapply

CDM/GoldStandardrequirementsapply

VoluntaryC


res)

ChicagoClimateExchange(CCX)

Regu

latorysurplustest

Definedasnewproject

Com

monPracticetest

CCX-d

evelopedpre-definedbaselinesand

methodologiesforeachspecificprojecttyp

e

VoluntaryG

HGReductionPrograms

ClimateLeaders

Larg

elyaperformancestandardapproa

ch

Regu

latorysurplustest.

Baselineandmonitoringprotocolsareout

linedin

detailforeacheligibleoffsetprojecttype.

CaliforniaClimateActionRegistry

(CCAR)

Perfo

rmancestandardapproachwherepossible

Regu

latorysurplustest

Perform

ancestandardsusedwherepossib

le

Generalproject-specificmonitoringprotoc

ols

develo

ped


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Nameofp

rogram

Add


ts


rotocols

VoluntaryG


WBCSD/WRIGHGProtocolforProject

Accounting

Proje

ct-basedandperformancestandardapproachesguidelines

prov

ided.Norequirements

Genericguidelinesforproject-specificand

performancestandardbaselinequantificationand

monito

ringprotocols.Norequirements.

ISO14064

Proje

ct-basedandperformancestandardapproachesguidelines

prov

ided.Norequirements

Generalguidanceofferedforbaselinequantification

andm

onitoringprotocols.Norequirements.

VoluntaryS


GoldStand

ard

CDM

additionalitytool(latestversion)

Previousannouncementchecks

GSCE

Rs:allmethodologiesapprovedbyCDMEB

GSVERs:allmethodologiesapprovedbyCDM

EB,Sm

allScaleWorkingGroup(SSCWG),

United

Nation

sDevelopmentProgram(UNDP)Millennium

Develo

pmentGoals(MDG)CarbonFacility

Newm

ethodologiesmustbeapprovedby

GS

TechnicalAdvisoryCommittee.

VoluntaryO

ffsetStandard

CDM



VoluntaryC

arbonStandard2007

(VCS2007)

Regu

latorysurplustest

Implementationbarrierstest

Com

monpracticetest

Perfo

rmance-basedandpositivetechnologylist-based

approacheswillbeeligibleinthefuture.

Noperformancetestsor

technologieshaveyetbeenapprovedby

VCS.

Project-specificquantificationprotocolsapprovedby

VCS.

AllCD

Mmethodologiesapproved.

Green-eClimateProtocolfor

Renewable

Energy

Regu

latory,legal,institutionalsurplustes

tand;

Timingtest(projectstartdate)

Technologytestandperformancetest

Project-specificstandardizedmethodology

developed


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Nameofp

rogram

Add


ts


rotocols


Requ

irementsofeachstandardapply

Requirementsofeachstandardapply

VoluntaryO

ffsetRetailers

ClimateTru

st

Regu

latorysurplustest

Barrierstest

Com

monpracticetest.

Baselinequantificationdevelopedinitiallybyproject

develo

persandverifiedbythird-partyauditors.

Monito

ringplansmustmeetrequirements

established

bythe

ClimateTrust.

TerraPass

VCS

andCCXrequirementsapply

Notpu

bliclyavailable

NativeEnergy

Regu

latorysurplustest

Barrierstest

Com

monpracticetest.

Project-specificquantificationprotocolsdeveloped

Myclimate

CDM




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3.5 Program administration and authority

Table 3.5 lists the actors responsible for regulating various key aspects of each offset

program: overall administration, validation and/or verication, and project approvaland registration. All offset programs include some form of administrative body to

oversee the project approval process to ensure that the offset projects developed meet

established program requirements. Although there are several common components ofthe project approval process, programs have developed varied approaches to confrontkey quality assurance concerns.

Validation requirements provide ex-ante assessment and conrmation of offsetproject eligibility as dened by the rules of the program or standard.

Verication requirements provide ex-post assessments and conrmation ofquantication of the volume of emission reductions or removals that have beenproduced from an offset project across a certain period of time.

Registries have been used to reduce concerns regarding double counting bytracking information regarding ownership and development of the offset projects

and the credits generated.

Third-party auditors are required by some programs to help limit any potentialconict of interest between offset project developers and buyers, which bothhave nancial incentives for inating the volume of offset credits generated.

Project approval requirements vary among standards. Some programs havea decision- making body that approves offset projects after documentation is

submitted by auditors/project developers. Other programs use the auditors toapprove the projects and there is no additional project approval step.

The structure of program administrators varies by program type and design (see Table

3.5). Compliance programs are generally administered by either an existing regulatory

agency, as in the case of state regulatory agencies under RGGI, or an administrative body established exclusively for the offset program, as in the CDM EB. Voluntaryoffset providers are managed by a mix of Boards of Trustees, advisory committeesand paid staff.

Nearly all programs require some form of project validation and verication.Increasingly, programs require verication to be conducted by an approved third-party auditor independent of either the program administrator or the project developer.

Exceptions include the NSW GGAS, which assesses the need for project vericationon a case-by-case basis, and the Climate Leaders program, which recommends but

does not require third-party verication.

Some programs/standards give their auditors the decision-making power to approve orreject a project. Others have a separate body to evaluate and approve projects. Such a


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program or standard-based decision-making body adds another layer of quality control.Offset programs have incorporated the use of carbon offset registries to keep track ofoffset ownership and to minimize the risk of double counting. A registry assigns a

serial number to each veried offset and once the offset is used to claim emissionreductions, the serial number is retired preventing the credit from being resold. Nouniversal registry exists for either the compliance or voluntary offset markets, limitingtheir utility for minimizing double counting across the offset market. Instead, differentregistries have been developed; some tied to specic retailers, standards or complianceprograms, as in the case of the CDM Registry and the CCX Registry, and others whichfunction independently.


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Table3.5:ProjectApprovalProcess:Progr

amAdministrationandAuthor

ity

Nameofp

rogram

Whoadministers?

Whovalidates/

verifies?

Who

approves/

registers?

Nameofregistr

y


CleanDevelopmentMechanism

(CDM)

CDMExecu

tiveBoard

DesignatedOperational

Entities(DOEs)

CDM

Executive

Board

CDMRegistry


JISuperviso

ryCouncil

AccreditedIndependent

Entity(AIE)

AIEunlessareview

isrequested,in

which

casetheJI

Super

visoryCouncil

appro

vestheproject

Offsetcreditstrac

ked

inrespectiveNational

Registries.

Mandatory


AustraliaN

ationalEmissions

TradingSys

tem

Underdeve

lopment

Underdevelopment

Underdevelopment

Underdevelopment

CanadasO

ffsetSystemfor

Greenhous

eGases

EnvironmentCanada

Underdevelopment

Enviro

nment

Canada

Underdevelopment

NewSouth

WalesGreenhouse

GasAbatementScheme(NSW

GGAS)

IndependentPricingandRegulatoryTribunal

ofNSW

(IPART)

Approvedthird-party

auditorinAuditand

TechnicalServicesPanel.

IPART

NSW

GGASRegistry

RegionalG

reenhouseGas

Initiative(RGGI)

Stateregulatoryagencies

Accreditedindependent

verifier

Stateregulatory

agenc

ies

Underdevelopment


Underdeve

lopment

Underdevelopment

Underdevelopment

Underdevelopment

OtherMan


AlbertaOffsetSystem

AlbertaGo

vernment

Endorsedbythird-party

auditor

AlbertaEnvironment

AlbertaOffsetRegistry

currentlyunderdevelopment

Statepowerplantrules(OR,

WA,MA)

OR:Energy

FacilitySitingCouncil

WA:EnergyFacilitySiteEvaluationCouncil

MA:Depar

tmentofEnvironmentalProtection

Varies(ClimateTrust

performsthisfunctionin

a review of offset programs: trading systems, funds, protocols, standards and retailers

Documents