California offset supply hit by strict rules: expert

LONDON Thu Nov 1, 2012 5:32am EDT

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LONDON Nov 1 (Reuters Point Carbon) - Suppliers of offset credits to California's carbon emissions market will only be able to meet a third of demand unless the state approves more project types, a move that could drive up the cost of complying with the scheme, an expert said Tuesday.

Companies that have their carbon dioxide emissions capped under the cap-and-trade scheme are allowed to use up to 200 million offset credits this decade to meet their targets.

But the California Air Resources Board (ARB) has only approved four project-types for delivering the offsets.

These project types will not be able to generate more than 67 million offsets by 2020 at most, said Belinda Morris, California director of the American Carbon Registry (ACR), which develops offset protocols.

The shortfall is likely to drive up market prices, making compliance more costly to businesses, Morris said.

"Allowance prices are very sensitive to offset supply. The fewer credits there are, the higher the allowance price is going to be," she told an environmental markets conference in Santa Monica last week.

So far, ARB has given the nod to projects in forestry, urban forestry, agricultural methane and ozone depleting substances.

The credit gap can be shrunk, but not closed, if ARB officials approve a host of other project types they are considering next year.

Those include blueprints for coalmine methane, rice management, and fertilizer management projects.

To further boost supply, the ARB could reconsider a protocol designed to cut methane emissions from pneumatic valves in the oil and gas sector, which was developed by ACR, Morris said.

ARB originally showed interest in the protocol, but had a change of heart after officials in the Canadian province Quebec, a potential market partner, expressed their misgivings.

But even if the ARB gave the green light to all of those project types, it would only raise the number of compliance-grade credits in the market to about 130 million - still 35 percent short of demand, Morris said.

Some offset project developers expressed frustration that the ARB has yet to approve offset verification bodies, appoint offset registries, and begin issuing ARB-approved offset credits.

Morris said it's understandable given the ARB's focus on the November 14 allowance auction, the program's first.

Meanwhile the secondary market for offset credits has been frozen for weeks as buyers await the outcome of a lawsuit by two environmental groups challenging their use in the cap-and-trade program.

Businesses including an oil company and mainstream environmental groups like the Environmental Defense Fund have voiced support for the use of offsets in the program in official court documents.

A hearing on the case is scheduled to take place on December 7 in San Francisco.

(Reporting by Rory Carroll)

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