If you’ve ever focused much on carbon offsets, you’re probably familiar with the standard orthodoxy of requirements: Offsets must be real, additional, verifiable, and permanent.
While almost everyone agrees that offsets must, at a minimum, meet this set of tests, exactly how they go about doing so remains the subject of ongoing debate, especially in anticipation of a federal compliance offset market.
Offset permanence will likely become an increasingly important issue in the federal cap-and-trade debate, at least in part because of the popularity and availability of domestic land use, land use change, and forestry (LULUCF) related offsets. The permanence issue is arguably most relevant to LULUCF project types because these projects involve boosting and protecting biological carbon sinks. This means credits are issued based on the amount of carbon stored in plants, trees, and soil.
Permanence risk is also one of the biggest challenges of crediting forestry and land use projects, and is one reason this project category has comprised such a small slice of the Kyoto Protocol’s Clean Development Mechanism (CDM).
These project types differ from other more typical offset projects, such as methane destruction. While destroying a ton of methane is permanent and cannot be reversed, the carbon stored in a forest can be released to the atmosphere from fire, disease, insects, harvesting, changes in land use, and land development.
Fortunately, methods to address permanence have evolved over time, and there are now a number of policy tools through which permanence can be insured or reversals addressed. The market has moved away from the problematic use of temporary credits established under Kyoto and toward certain types of legal guarantees, buffer pools, and financial insurance.
Here is a brief primer on the various approaches to permanence, and how they have been applied under different programs:
Temporary Credits
The Kyoto Protocol's CDM attempted to address permanence in afforestation and reforestation (A&R) projects by issuing temporary credits (called tCERs and lCERs) with expiration dates. Under the CDM, once a credit expires, it must be replaced with another valid credit.
For example, if a project developer plants trees in 2009 and elects to receive lCERs, those credits are “valid” for the duration of the crediting period, say 30 years, and then will expire. An emitter using those credits for compliance purposes must obtain and retire a new credit at the end of that 30-year period to stay in compliance with their emissions obligations from 2009.
This administratively complex process has created significant disincentives for CDM forestry credits, since most project developers and compliance buyers prefer to develop or purchase credits that don’t disappear at some point in the future. Furthermore, the approach incorrectly treats all forest carbon as though it were impermanent, ignoring LULUCF projects where no reversals actually take place.
Legal Guarantees
Requiring legal guarantees to ensure permanence is one alternative to temporary crediting. For example, the Climate Action Reserve (CAR) and the Regional Greenhouse Gas Initiative’s (RGGI) forestry protocols to date have required landowners to secure permanent land conservation easements.
In the case of RGGI, the easement must ensure the land is maintained in a perpetually forested state and the project developer must have the easement approved by the appropriate state regulatory agency. RGGI also requires that the conservation easement ensures the carbon sequestration achieved by the project is maintained in the long-term -- even after the end of the crediting period -- and that the land is managed according to sustainable forestry practices.
The conservation easement approach has been applied to a number of the earliest projects under CAR, but some stakeholders have complained that requiring such an enduring commitment without the option for modification, particularly in the face of uncertainty about future carbon prices and other market dynamics, precludes the participation of many potential projects.
Furthermore, there is a potential that the only landowners willing to put their land into permanent easement would have done so anyway, so requiring a permanent easement would create a perverse incentive for only non-additional projects to be approved. More flexible legally binding approaches also exist, beyond permanent easements, and in many cases these may be a good complement to other mechanisms for ensuring permanence and addressing reversals, such as buffer pools and financial insurance (see below).
Financial Insurance
Some insurance companies now offer insurance instruments to mitigate a variety of offset project related risks, including permanence. Many such companies already offer forest insurance for protection of commercial forest assets against pests, diseases, fires, etc., so extending that coverage to include carbon may be a logical next step.
Obtaining financial insurance for forestry offset projects has generally not been required in order to address reversals and permanence risk. In the Waxman-Markey bill, however, insurance “that provides for the purchase and provision to [EPA] for the retirement of an amount of offset credits or emission allowances equal in number to the tons ... released due to reversal” is listed alongside a buffer pool as one potential mechanism recommended to the EPA to address permanence.
Buffer Pools
Buffer pools address permanence risk by evaluating a project’s risk profile before requiring a portion of the earned offsets earned are set aside into a shared buffer pool.
The buffer approach was pioneered under the Voluntary Carbon Standard (VCS) as an alternative to temporary credits that promotes a more permanent, fungible asset, therefore mitigating buyer and seller liability. Similar to insurance programs that reward clients with safe driving records, buffer pools can also be structured to reward project developers with credits for “good behavior.” Under the VCS, project developers with verifiable risk ratings that have over time remained stable or decreased can have a portion of their buffer credits returned to them. Periodic “true-ups,” where the number of emissions sequestered by projects and the number of offsets issued are compared to one another, also help ensure that the buffer pool is sufficient to cover any losses. Buffers or risk ratings can be adjusted for projects as needed to more accurately reflect their permanence.
The Waxman-Markey bill establishes a similar mechanism, called an offsets reserve, which operates in essentially the same manner as the VCS buffer pool. For any reversal, EPA will cancel offsets to fully account for the tons that are no longer sequestered. If the reversal was intentional (i.e. a landowner cuts down his trees) the project developer must also “repay” the reserve in offset tons, in full. If the reversal was not intentional, the project developer must still contribute an additional number of offsets to the reserve above those cancelled by EPA to address permanence, but in this case the quantity is only a fraction of the project’s reversal.
While permanence can be a difficult issue to tackle, it is not insurmountable and there are a number of tools that can be used to address it. Questions about permanence should not impede the inclusion of LULUCF offset projects in U.S. carbon market design. As the Waxman-Markey Bill moves forward, policymakers and constituents alike must understand the pros and cons of these approaches to ensure the core tenet of offset permanence is met in a way that is robust and will facilitate LULUCF project development.
Aimee Barnes is senior manager of U.S. regulatory affairs at EcoSecurities, a company working to mitigate climate change through projects that reduce greenhouse gas emissions globally.
Forest image CC licensed by Flickr user Ecotrust Canada.