The Value of Offsets in Oregon

1
The Value of Offsets in Oregons Load-Based Cap
and Trade System

• Carbon Allocation Task Force
• Presented by Michael Ashford
• June 1, 2006

2
Agenda

• Background on The Climate Trust
• Rationale for Offsets
• Policy
• Economic
• Offsets are an Established Policy Option
• Importance of Offset Quality
• Offsets Support the Oregon GHG Strategys Guiding
  Principles

3
Background on The Climate Trust
4
The Climate Trust Mission OffsetsThe Trust is a
501(c)(3) Non-Profit Corporation

• The Climate Trust promotes climate change
  solutions by providing high quality greenhouse
  gas offset projects and advancing sound offset
  policy.
• 3 Main Programs
• Oregon Power Plant Offset Program
• Greenhouse Gas Offset Partnership Program
• Offset Policy Initiative

5
Who is The Climate Trust?Independent Buyer of
GHG Offsets

• Market Leader
• One of the largest, most experienced offset
  buyers in US and world markets
• Only state-recognized offset provider
• Portfolio 11 projects, 4.5 million, 1.7 million
  metric tons CO2
• Pipeline Placing 7 million more now

6
Who is The Climate Trust?Promoting Sound Offset
Policy

• Offset Policy Resource
• Contributing directly to viability and
  integration of offset policy at national,
  regional and state levels
• RGGI, California, Massachusetts, Washington
• USEPA, 1605(b), Senator Domenici Bingaman
  Climate Change White Paper
• Outreach and Communications
• UNFCC Conference of Parties, International
  Emissions Trading Association, CarbonExpo,
  California Climate Action Registry, National
  Association of Regulatory Utility Commissioners

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Economic and Policy Rationale for Offsets
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What is an Offset? (theory) Specific Project
That Reduces GHG Levels
CO2 emissions
The baseline case
Baseline emissions
Offsets
Project emissions
The project case / monitoring verification
years
Project begins
Project ends
9
Truck Stop Electrification
What is an Offset? (practice)Specific Project
That Reduces GHG Levels

• I-5 Corridor in OR and WA
• Shutting-down-and-plugging-in shifts from
  diesel idling to lower carbon grid electricity
• 90,000 metric tons CO2
• Saving estimated 10 million gallons of diesel
  fuel
• Emissions co-benefits
• 1,400 tons of nitrogen oxides (NOx), 40 tons of
  particulate matter (PM)

• 16 year contract

10
Policy Rationale for OffsetsMore Money for Other
Priorities

• Effective in reducing GHG levels
• Lower climate change mitigation cost to society
• Funding driver
• into un-capped sectors
• into new innovative technology
• Economic co-benefits
• Create jobs save money on energy enhance energy
  security by reducing oil imports create demand
  for clean energy products.
• Environmental co-benefits
• Reduce air pollution preserve biodiversity
  improve habitat, watersheds, and water quality
  reduce soil erosion protect endangered species

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Economic Rationale for OffsetsEstimated Ranges
for Mitigation Costs

• Illustrative GHG mitigation prices
• US Offsets (Climate Trust) 4 - 7/ton
• Kyoto CDM offsets 9 - 12/ton
• Allowances in Europe 25/ton
• Efficiency 15 - 40/ton
• Wind Green Tags (10/mWh) 15/ton
• Geo-Sequestration More

Cost to utility for mitigation in conventional
coal plant
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Economic Rationale for OffsetsPower of the Market

• Offsets specifically expand the scope of the
  program and serve to unleash the power of the
  market to stimulate innovation and
  cost-effectively reduce emissions.
• Pew Center on Global Climate Change
• Offsets help protect the market against price
  volatility and reduce the transaction costs of
  the emissions trading market by increasing market
  liquidity.
• The Nature Conservancy

Senators Domenici Bingaman White Paper
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Why are Offsets Important?

• Cap and Trade Logic The gains of trade

10
Will buy at 9 and save 1
8
Will sell at 9 and make 1
Marginal cost of GHG reduction for given market
Offset Innovation Capturing Further Efficiencies
Will buy at 5 and save 5
10
Will buy at 5 and save 3
8
5
Will sell at 5 and make 5
Marginal cost of GHG reduction with offsets
Prices are for illustrative purposes only
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Offsets Fill a Crucial Need NowCritical to
Transition to Lower Carbon Economy

• Bridge the Technology Gap
• Cheap Coal IGCC Geological sequestration
• Pew Center for Global Climate Change It will
  take decades to transition capital stock of power
  generating plants to low carbon sources, so there
  is a critical need for offsets as a way of
  cutting net emissions affordably in the short and
  medium term.
• Fundamental Principle of GHG Policy
• All sectors should be required to contribute
  to the climate solution, whether they participate
  as capped sectors or as offsets. The rationale
  for this is that climate change is such a large
  problem that all sectors should be asked to be
  part of the solution even source that are
  designated as offsets. Center for Clean Air
  Policy

Senators Domenici Bingaman White Paper
15
Offsets are an Established Policy Option
16
Where are Offsets Traded Now?

• Kyoto Protocol
• Joint Implementation, Clean Development Mechanism
• EU Emissions Trading Scheme
• New South Wales
• Voluntary Markets
• PGE, Ford, British Airways, Nike
• Climate Trust, CCX

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Offsets in State Policy

• Oregon CO2 Standard
• Washington Standard
• Massachusetts Standard
• California
• The focus in Oregon and Washington is to
  ensure high-quality, cost-effective offsets that
  provide a permanent and viable nexus between
  those responsible for climate change emissions
  and the currently available solutions to reduce
  and eliminate those emissions over time. A
  program similar to the Climate Trust program
  should be considered for California.
• Climate Change Action Team Report to the Governor
  (March 2006)

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Offsets in Regional Policy

• Regional Greenhouse Gas Initiative
• 50 of required reductions can be offsets
• The RGGI offsets component is a flexibility
  mechanism that provides a measure of insurance
  against high allowance prices. By allowing a
  wider range of technical options outside the
  electric power sector to be used to achieve
  emissions reductions, compliance costs will be
  lowered.
• RGGI Staff Working Group Evaluation of Offsets
  Supply and Potential Demand

19
Offsets in Federal Policy

• Senator Domenici and Bingaman White Paper
• Extensive discussion of offsets
• Offset Pilot Program
• McCain-Lieberman Climate Stewardship Act
• 15 of required reductions can be from offsets
• Senator Feinsteins Strong Economy and Climate
  Protection Act
• Substantial offset provisions, particularly in
  the agricultural sector

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Importance of Offset Quality
21
Quality Projects Selection CriteriaRigorous
Internal and External Review Process

• Primary selection factors
• Additionality
• Cost effectiveness /metric ton of GHG benefit
• Reliability of technology
• Reliability of project partner
• Other project selection factors include
• Monitoring verification - Replicability
• Permanence - Expandability
• Guarantees - Portfolio diversity
• Location of project - Co-benefits

22
Quality Projects Additionality Projects Must
Create New Emissions Benefits

• Mitigation measures that would not occur without
  offset project funding
• Excludes common practice, regulated activities
• Money making projects eligible, if other barriers
• Types of barriers offset funding overcomes
• Limited or no access to capital
• Investment hurdle rate
• No economic return
• High perceived risks
• Resource availability
• Infrastructure

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Quality Projects Quantification Experts Prepare
Baseline Studies and MV Plan

• Baseline study
• Build in expected changes from business as usual
• Monitoring Verification Plan
• Measurement technique
• Periodic measurement
• 3rd party verification
• Funding plan
• Escrow to ensure sufficient MV funding
• Results used in contracts to verify delivery

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Ensuring Quality Mitigating RiskTop Priority
for The Climate Trust

• Due diligence during project review
• Technology and its offset attributes
• Offset provider
• Portfolio diversity mitigates risk
• Structuring our contracts to mitigate risk
• Preserving our capital
• Reducing the risk of underperformance
• Defining the ownership of offsets

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Preserving Offset Fund Capital Capital
Preservation is a Fiduciary Responsibility

• Pay after the event creating the offsets
• Pay for verified tons as they occur
• Pay for program installation of measures
• Pay upon commercial operation (Engineers or 3rd
  party certification)
• Conditions precedent to closing (Rely on senior
  lenders)
• Security interest in project equipment

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Reducing Underperformance RiskEnsuring We Get
Tons After We Pay Our Money

• Most contracts include delivery guarantees
• Full or partial guarantee of quantity of tons
• Takes several forms
• Replace tons if a shortfall occurs
• On power generating projects where we pay upon
  commercial operation, we require a guarantee of
  the anticipated quantity of tons
• Give money back
• Program offsets include performance milestones
  Trust can de-obligate
• Active role in managing our offset contracts
• Define remedies for underperformance based on
  regular reporting

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Defining the Ownership of OffsetsEstablishing
Legal Basis for a New Commodity

• Extensive legal definitions regarding offsets
• Developer transfers any and all rights to CO2
  reductions
• Bill of Sale
• Annual Offset Certificate
• Third party verification of the quantity of
  offsets delivered
• Programmatic offsets Participation agreements
  create a clear ownership trail to tons of CO2

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Avoiding Double CountingCritical to
Environmental Integrity

• Seller exclusions
• Seller cant sell the same tons to another entity
• Seller cant use the tons for other purposes
• No sale of CO2 in environmental products
• E.g., Green Tags
• Disclosures and disclaimers
• Written disclaimers from all partners
  participants
• Disclose sale to regulatory authorities others
• Define what bragging rights are OK

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Offsets Support the Oregon GHG Strategys
Guiding Principles
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Science-Based Effective Reductions

• Principle A Oregons reduction goals and
  solutions should be firmly grounded in science
  and lead to effective GHG reductions
• Offsets yield real emissions reductions based on
  rigorous monitoring and third party verification.

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Cost-Effectiveness

• Principle B The Task Force shall begin with the
  most cost-effective solutions first.
• Offsets direct funding towards the lowest-cost
  mitigation source.
• Utilized only when they are more cost-effective
  than other means.
• Flexibility afforded by offsets will help the
  load serving entities meet their emissions
  reduction targets most efficiently and most
  cost-effectively.

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Offsets Especially Relevant in a Two-Player
Market

• Oregon
• Two capped entities with large carbon footprints
  and several smaller entities with small
  footprints
• Placeholder Price cap of 40/ton
• Without offsets
• Trading more prone to gaming and likely to occur
  close to the price cap
• With offsets
• Offset price is another price point in the mix
• Capped entity has alternative, (lower) cost
  option
• Drive down overall cost of program

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Two-Player Market

• Cap and Trade No offsets

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Will buy at 30 or less
15
Will sell at 16 or more
Transactions may move towards highest marginal
cost
Cap and Trade Plus Offsets offer alternative
price
Will buy at 30 or less
30
Will sell at 16 or more
15
10
Will sell 10 or more
Transactions more likely to move to lower
marginal cost
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Economic Development Innovation

• Principles C, E G High level of emphasis on
  economic development and long-term economic
  well-being of Oregon economy.
• Oregon can use the transition to clean energy as
  an engine for economic development.
• Offsets encourage development by driving funding
  to technologies that reduce GHG emissions.
• Utilize agricultural sector and rural assets
• Capitalize on Oregons unique leadership
• Climate Trust, Bonneville Environmental
  Foundation, Energy Trust of Oregon

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Equity

• Principle J Addresses equitable allocation of
  costs and benefits when implementing the
  Strategy.
• Offsets essentially transfer money from those
  causing climate change to those feeling its
  effects and those best equipped to immediately
  contribute to its solution.

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Conclusion

• Offsets directly support the OR GHG Strategys
  Guiding Principles
• OR should build on the millions of dollars
  successfully invested (and being invested) in
  offset projects
• Another Oregon First for the policy arena
• There is a strong independent rationale for
  offsets
• policy economic benefits
• Offsets are a widely recognized and accepted
• globally, nationally, regionally, and other
  states
• Offset quality is driving acquisitions

38
Thank You

• Michael Ashford
• Deputy Director
• The Climate Trust
• [phone]
• mashford_at_climatetrust.org