This November, with its economy struggling, California plans to conduct its first auction of carbon permits as it launches an ambitious cap-and-trade program as part of its AB 32 legislation to reduce greenhouse gas emissions. The program will be the second largest program of its type in the world, behind the European Union's, and the largest in the United States.
The program creates a market where facilities that emit carbon dioxide or other greenhouse gases like methane can buy and sell credits that enable them to meet their obligations under AB 32's "cap" on emissions.
In order to control costs, businesses may use carbon emission reductions measured in tons from sectors that are not directly regulated by the program, known as "carbon offsets," to meet their individual obligations through approved carbon offset projects. Such a market-based mechanism allows policymakers to meet their environmental goals at a lower cost to society while providing greater flexibility to business. It's an essential tool for businesses to reduce their costs of compliance with AB 32.
This sounds great, but there's a catch. Right now, carbon offset project types are limited to those that the California Air Resource Board approves. Industry analysts expect the program to need as many as 220 millions tons of carbon offsets and so far the ARB has only approved a few project types that will not produce the needed supply for cost-effective compliance options under AB 32's requirements. Recent analysis by the American Climate Registry finds there will be a significant shortage of offset supply by 29 percent in the first compliance period and up to 67 percent by the third compliance period.
Fortunately, there are numerous other project types that can help meet these goals. Some use various means to capture methane, a potent greenhouse gas, from landfills. Another project type allows natural gas exploration companies to replace old leaking pneumatic valves with new more efficient ones that are not mandated by regulation.
To facilitate the investment to create these carbon offset projects, clarity is needed early in the program. Unfortunately, the ARB has not presented a plan explaining how it will remedy this problem. Publicly, it puts forth rosy offset supply forecasts that deny a problem even exists and presumes that it will be able to fix any problems later. Two things are needed now to remedy this situation. The first is for ARB to publish a transparent plan with set timelines that outlines how new offset project types will be selected and approved. Second is for ARB to actually approve new project types, like the ones mentioned, soon.
This summer, in a rare display of agreement, legislation to clarify carbon offset projects was supported by both business groups like the California Chamber of Commerce and the Western States Petroleum Association, and environmental groups like Environmental Defense and the Natural Resources Defense Council, among others. It was a solid example of the business community and the environmental community working together to make the implementation of AB 32 work. Unfortunately, this legislation did not move forward in the session. But let's not lose sight of how parties can work together to protect our environment and ensure our economy grows in California.
Time is of the essence. It takes time to adopt new offset protocols and develop carbon offset projects one to two years is common. Supply will lag with the lack of a clear process to accelerate the development of offsets. This does not factor in the long regulatory process under which ARB must operate, the lack of transparency in the rule-making process and the often-extended timelines.
Without enough lead time, clarity and capital to develop and invest in offset projects, the program runs the serious risk of a significant offset supply shortage. This would lead to higher carbon credit prices that increase the program's cost to businesses, consumers and ratepayers, and threaten the program's political support. It would damage the program's ability to demonstrate that markets can be used to meet environmental goals.
The state's growing clean technology sector could lose an important price signal around which to innovate. And finally, we could risk losing the opportunity to show the country and the world that this can work here in California while encouraging economic prosperity. The ARB needs to act fast and now. This is something that both the business and environmental community already agree on.