California leads the way towards REDD+ carbon markets

20 Feb 2011
Posted by Chris Cosslett

A recent low point in the US effort to address climate change was the Obama Administration's failure in 2010 to ensure Congressional approval of the American Power Act (APA), which had promised significant measures to reduce greenhouse gas emissions. This outcome was a particularly harsh blow for supporters of REDD+, who had been heartened by the draft bill's strong support for forest sector offsets. 

In November, matters had a chance to get substantially worse. On the ballot in California for the US mid-term elections was Proposition 23, a referendum question backed by big oil companies and aimed at overturning Assembly Bill 32 (AB 32), California's Global Warming Solutions Act of 2006. AB 32 had been passed by the California state legislature and signed by then Governor Arnold Schwarzenegger back in 2006.  The AB 32 Scoping Plan, approved in December 2008, is aimed at putting California on the path to meet the law's goal of reducing GHG emissions to 1990 levels, i.e., 427 million metric tons of CO2 equivalent, by the year 2020, and ultimately achieving an 80% reduction from 1990 levels by 2050. The scoping plan identified a cap-and-trade program as one of the key strategies California would employ to this end, and required California's Air Resources Board (ARB) to adopt cap-and-trade regulations by January 1, 2011. Had it been approved by voters, Proposition 23 would have suspended implementation of AB 32 until the state's unemployment rate dropped below 5.5 percent for one full year, something that has rarely happened. (California's unemployment rate currently stands at 12 percent). In the end, the measure was soundly defeated, by a vote of 61 to 39%.

Both before and after the scare caused by Prop 23, the rulemaking, or process by which ARB promulgates the regulations needed to implement AB 32, continued apace, culminating in California's approval, on December 16th, of detailed regulations governing AB 32's cap-and-trade mechanism.  Given that the state has the world's eighth largest economy, with a gross state product (GSP) of $1.7 trillion in 2009, and has historically been a trend setter in the area of environmental management, it is not surprising that this event has been called one of 2010's most encouraging developments in REDD+, not least because it establishes a compliance market with demand for up to 74 million tons of CO2 equivalent.

So what does this success for market-based REDD+ look like and what implications might it have for broader global efforts to launch a REDD+ mechanism? To understand this, it may be useful to quickly review how a cap-and-trade system works and where offsets fit in. Fortunately, the approved regulation itself provides a useful primer:

ARB will place a limit, or cap, on GHG emissions by issuing a limited number of tradable permits (called allowances) equal to the cap. Over time, the cap will steadily decline. The cap is enforced by requiring each source that operates under the cap to turn in one allowance or offset credit for every metric ton of carbon dioxide equivalent (MTCO2e) that it emits. In addition to allowances, a limited number of credits for emissions reductions from sources that are outside the cap coverage, called offsets, can be used for compliance with the program. At the end of each compliance period, covered entities are required to turn in, or surrender, enough allowances and offsets to match their emissions during this time period....Offset credits are issued from projects developed using ARB-adopted compliance offset protocols.  Compliance offset protocols contain the project eligibility criteria to ensure reductions are additional, quantification methodologies and regulatory verification and enforcement requirements, as required by AB32.  Therefore, they represent the standard by which offset projects are reviewed and judged.  They contain the basic methods and procedures to conduct the offset project and determine the greenhouse gas reduction benefits. 

The regulation includes and adopts four compliance offset protocols, namely: (i) U.S. Forest Projects, (ii) Urban Forest Projects, (iii) U.S. Ozone Depleting Substances Projects; (iv) Livestock Manure [Digester] Projects). As a result, beginning in 2012, forestry offsets generated by US landholders will be eligible to begin trading under the new system. In the case of REDD+, it adopts a framework by which international forestry credits could, either through a new protocol, and/or through one or more "ARB-approved offset programs," be eligible for trading under the state's cap-and-trade system.

The regulation thus opens wide the door to compliance markets in the case of US forest sector, while also opening it a significant crack for international REDD+ projects. As such, it very clearly recognizes and aims to take full advantage of the potential of both the US and international forestry sectors to generate offsets and thereby to help contain the overall costs of California's cap-and-trade program. 

 In the case of the US forest protocol, significant concern is being expressed that at least some of the approved methods and procedures may be less than optimal from a biodiversity point of view.  In particular, there has been substantial debate over a provision for "even-age management", which is apparently one of several changes inserted into the Protocol following a substantial lobbying effort mounted by Sierra Pacific Industries, California's biggest land owner. To the 47 environmental and conservation organizations who mounted a last minute and unsuccessful effort to have the regulation revised, including sending a letter to ARB Chairperson Mary Nichols, this formulation amounts to 'clearcutting' and will lead inexorably to the replacement of natural forest with tree plantations. This debate will be hauntingly familiar to those who have followed or raised similar concerns regarding language proposed and supported by some countries within the UNFCCC negotiations.

The concerns of these groups and others were raised during the public hearing held on December 16th prior to the vote on the Regulation. However, ARB Chair Nichols, along with seven out of eight of the remaining Board members, were not swayed by these arguments, although Nichols later said that the Board would be looking at additional provisions to "make it absolutely clear that we are not going to provide any incentives for even-aged management" and  to ensure that "no projects [would be registered as offsets that had been done using any amount of clear cutting at all."

While the US Forest Projects Protocol was thus submitted and approved by the Board, a similar Protocol for international forest offsets remains to be developed. Significantly, however, the regulation recommends that the first sector-based credits to be incorporated in the cap-and-trade program should come from Board-approved REDD sector-based crediting programs. In order to encourage further movement in this direction, the regulation provides a "Framework" for REDD credits, which reads as follows:

"A protocol must be developed and approved by the Board to quantify, monitor, report, and verify emissions reductions achieved by REDD programs. To be considered for approval by the Board, a REDD program will need to be designed as closely to the following framework and criteria as possible:

REDD Plan. The host jurisdiction’s REDD program must be based on a forest sector plan that has been approved by the host jurisdiction and specifically:

o Assesses the local drivers of deforestation in its jurisdiction; identifies reforms and policies to address these drivers; identifies emissions from deforestation; and identifies systems to be used for data collection, monitoring, and the development of institutional capacity necessary to implement a deforestation reduction program.

o Establishes a timeframe for implementing the program and transitioning to low emissions development with respect to emissions from forest and land use activities.

Inventory. The REDD program must utilize the most up-to-date and comprehensive accounting of sources and sinks available to the host jurisdiction, and is consistent with estimates of carbon stocks and emissions based on forest classes defined in the Intergovernmental Panel on Climate Change Good Practice Guidance for Land Use, Land Use Change, and Forestry.

Reference Level. The REDD program must set a GHG emissions reference level that represents a conservative estimate across a jurisdiction’s forest sector. Staff’s initial thinking is that this reference level should be derived from absolute deforestation based on historic emissions averaged over a 10-year period and adjusted if necessary.

Crediting Baseline. The REDD program must set a crediting baseline based on specific targets for 2020 and beyond.

Nested Accounting. If the program is nested, it must include the necessary infrastructure for clear reconciliation of project performance with the performance of the sector as a whole.

Retirement. The program must include a retirement mechanism for removing the credits that have been used for compliance from the state-level accounting system, crediting baseline, and credits retired.

Public Participation and Participatory Management Mechanism. The REDD program must established and incorporated an effective public participation and participatory management process that provides for the consultation and full involvement of forest-dependent communities in affected areas during the planning, design, implementation, monitoring, and evaluation of program activities.

Protection Against Reversals. The REDD program must established a statewide forest sector performance insurance mechanism to ensure projects are not penalized for reversals against the jurisdiction’s crediting baseline.

In order to move from the above framework to a full-fledged Protocol and subsequent trading, California is likely to rely heavily on the Governor's Climate and Forests Taskforce (GCF) , which it helped to  establish in 2008. The GCF includes the following sixteen states and provinces from five member nations:

  • USA: California, Illinois, Wisconsin
  • Brazil: Acre, Amapa, Amazonas, Mato Grosso, Pará, 
  • Indonesia: Ache, Central Kalimantan, East Kalimantan, Papua, West Kalimantan
  • Mexico: Campeche, Chiapas
  • Nigeria: Cross River

The GCF has already made substantial progress, including drafting a set of design recommendations for Subnational REDD frameworks. During 2011, the GCF Task Force is expected to work closely with the ARB, as well as with REDD technical experts, scientists, stakeholders and research institutes, in order to refine guidance for a high-quality sub-national REDD program. ARB staff anticipate that REDD offset credits from Board-approved programs could enter the California market in 2015.

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