NEW YORK, Sept 14 (Reuters Point Carbon) - California's carbon market could be 29 percent short of offset credits in its 2013-2014 pilot phase if regulators do not expand their list of allowable project types, making it more expensive for companies to achieve their required emissions cuts, a new report said.
By the upcoming cap-and-trade system's third phase, from 2018 to 2020, the market will be 67 percent - or 134 million tonnes - short of offsets, according to the American Carbon Registry (ACR), a registry for the voluntary offset market.
State regulators have so far approved four offset project types that can generate credits for the California cap-and-trade system, but they alone will not deliver a sufficient supply to meet maximum demand.
"Short supply of offsets will result in a higher overall cost of the program to California companies and residents, and could overwhelm the other cost-containment mechanisms ARB (Air Resources Board) has built into the program," said the ACR.
Companies can buy offset credits to meet their emission caps more cheaply than investing in new technology to limit CO2 output and buying emission allowances.
Emission allowances have been trading at around $16/t, while offset credits have been fetching in the $11-$12/t range.
Companies can use offset credits to meet up to 8 percent of their obligation to help bring California's greenhouse gas emissions down to 427 million tonnes of carbon dioxide equivalent (CO2e) by 2020 - the same levels they were in 1990.
Over the California market's three compliance periods, total cumulative offset demand could reach just over 200 million tonnes, according to the ACR.
EXPANDING THE LIST
California's carbon market currently accepts carbon credits from four offset project types: forestry, urban forestry, ozone depleting substances and agricultural methane.
But the ACR, which has developed a handful of offset project guidelines, has said that adopting three or more project types for use in the California market could help narrow the supply gap.
The registry said that the adoption of three protocols it has developed for pneumatic valve (plugging holes in leaky gas pipelines), coal mine methane capture and rice management projects could help close the gap by adding an additional 7 million credits.
California regulators, however, banned the use of pneumatic valve credits in July.
Even if regulators approved those three protocols there would still be a 35 percent shortfall by 2020.
Regulators are also weighing whether to approve fertilizer management and avoided deforestation projects to generate eligible credits in the future.
(Reporting by Valerie Volcovici)