From the Carbon-California Desk

Study Highlights California Carbon Offset Supply Shortage

American Carbon Registry releases offset supply analysis for California carbon market, projecting 29% shortage by 2015, 67% shortage by 2020.

A report released today by the American Carbon Registry (ACR) points to a significant shortage of offsets in the California carbon market.  Offset demand in a California cap-and-trade market is expected to reach just over 200 million metric tons co2 equivalent (MMTCO2e) by 2020. To date, the regulators in California have only adopted four protocols for compliance use – US ODS, Livestock Methane, Forestry and Urban Forestry.

Based on the four Compliance and Early Action Protocols adopted, the analysis projects a shortage of 29%, or 7.6 MMTCO2e, in the first compliance period (CP1) rising to 67%, or 134 MMTCO2e, in the third compliance period (CP3). As is currently the case in the pre-compliance market, US ODS and Forestry projects are forecasted to provide the majority of supply to the market.

The analysis looked at currently adopted protocols and considered the addition of the following protocols: Coal Mine Methane (CMM), Low-bleed Pneumatic Valves, Rice Management and Fertilizer Management. Despite their inclusion in the ACR study, ARB made statements in June indicating they are no longer considering pneumatics as an eligible project type.

ACR anticipates a majority of the 7.6 MMTCO2e short in CP1 would addressed by the adoption Pneumatics (5 MMTCO2e). Based on ARB's statements, these credits will not be available for compliance use, and credits from CMM and Rice Management protocols will still be insufficient to make up for the shortfall. If pneumatics are in fact "off the table" for California, compliance offset supply appears to remain short in CP1, and CMM early action is the only supply option with enough potential capacity to address this shortfall.

If the three aforementioned protocols were adopted in 2013 by California, the report states it will reduce the 2020 market short from 134 MMTCO2e to 70 MMTCO2e. Discounting for lack of supply from pneumatic projects, this shortfall is more likely to be 96 MMTOCO2e by 2020, and even larger amount of offsets needed to satisfy demand.

The analysis does not model the potential for credits from Reduced Emissions from Deforestation and Forest Degradation (REDD). Under the regulation, California has stated they will allow regulated entities to surrender credits from countries with high rates of deforestation, i.e. specific states within Brazil, Indonesia and Mexico. The credits are generated from protecting forested lands from deforestation, one of the largest sources (20-25%) of greenhouse gas emissions, globally.

Credits generated from nested REDD projects are expected to be large. However, California has restricted the quantity the market can absorb to 25% (of the 8% limit) each compliance period, or just over 50 MMTCO2e (2013-2020).

ARB can also consider a host of other protocols including Mexican-based ODS, N2O abatement, Organic Waste Digestion, amongst others, which ACR did not include in their analysis.

If you have any questions regarding offsets, or the California carbon market in general, please contact Evolution Markets' US Carbon Markets team at: +1 415.963.9137 or +1 914.323.0265.

(*: source: "Compliance Offset Supply Forecast", September 2012, Winrock International, American Carbon Registry)