California’s Market for Hard-to-Verify Carbon Offsets Could Let Industry Pollute as Usual
Timber, dairy and chemical companies line up to sell credits to biggest emitters
One hot day this spring John Buckley scrambled up a dusty slope of a patch of deforested land in the middle of California’s Stanislaus National Forest in the Sierra Nevada, five miles west of Yosemite National Park, and surveyed the bleak landscape: 20 acres of blackened tree stumps and the shriveled remains of undergrowth. On neighboring ridges, similar brown expanses dotted the green forest canopy. “This,” he said, spreading his arms wide, “is resource management.”
The denuded clearing is on a tract of private forestland owned by timber giant Sierra Pacific Industries that is close to being approved as a sort of carbon bank under California’s new cap-and-trade scheme. It will soon grow into a plantation of mostly Douglas fir, ponderosa pine and cedar.
Based on calculations of how much carbon the new and old trees in this forest area will remove from the atmosphere, the timber giant will soon be able to sell carbon credits, which regulators call “offsets,” to the largest California polluters so they can compensate for their greenhouse gas emissions. Looking to make a profit from their environmental practices, companies in forestry and other industries are rushing to meet the demand.
Buckley, an environmental activist from Tuolumne County, is dismayed that projects like these – that involve clearing out old, diverse forests and replanting the area with a handful of quick-growing timber varieties – are being considered as a means to enable California industries to emit more pollutants into the air.
Many environmentalists say that because it is notoriously difficult to prove that such projects actually reduce the state’s overall carbon footprint, California should proceed slowly in approving a vast expansion of the cap-and-trade market.
The plan is to start the Compliance Offset Program this summer. Sellers include some of the largest forestland owners in the U.S., dairy farms and companies that neutralize greenhouse effect-producing refrigerants. The program might also expand to other activities, such as methane capture from mining and rice farming.
Proponents say that by providing incentives to voluntarily reduce emissions and use new technology, the offset program could help California meet its legal requirement, set in 2006, to reduce its carbon footprint from all sources by about 16 percent by 2020, and even more in later years.
But critics call offsets a loophole that could undermine an effective cap-and-trade system. They say pledges of reductions that are not required by law often cannot be considered real, since companies might have made them anyway without the extra money from selling offsets. Left unchecked, the critics warn, poorly measured offsets could lead to an overall increase in California’s emissions.
Depending on the future price of offsets, the addition of these credits from around the country and possibly abroad could swamp the existing regulated emissions market. Independent environmental economists now estimate that offsets could grow to more than 200 million tons of carbon dioxide or the equivalent in other greenhouse gases – representing at least 50 percent of the program.
And under certain supply-and-demand conditions, state trading rules could allow offsets to cover 100 percent of the reductions required under cap-and-trade. In those circumstances, no power plant, cement factory or refinery would have to cut its emissions to comply with the carbon cap.
Offsets “create the illusion that we are doing something to mitigate climate change,” said Kathleen McAfee, a professor of international relations at San Francisco State University, who studies global markets for environmental services. Instead, she said, the government should impose strict regulations on fossil fuel extraction and invest in renewable energy technology.
Dave Clegern, a spokesman for the California Air Resources Board, the main state agency writing regulations to fight global warming, argued that carbon reductions can take many forms and should not be limited to one accounting method. He said several other regulatory programs in the state also aimed at lowering greenhouse gas emissions cover many of the same sectors regulated by cap-and-trade.
“Frankly, as long as the emissions are reduced we are achieving our goals,” Clegern said. “Whether that’s done with offsets, whether that’s done with allowances, whether that’s done with reductions, there obviously would have to be some reduction in there to achieve this.”
Billions of dollars
The cap-and-trade program, which went into effect in January, covers about 80 percent of the state’s greenhouse gas emissions, those emitted by the biggest electricity, industrial and fuel facilities.
It sets an annual limit on total emissions that California’s largest polluters can release. The total supply of pollution allowances falls each year, helping the state reach emissions targets established by the landmark Global Warming Solutions Act of 2006.
The offsets program allows regulated industries to use offsets to cover up to 8 percent of their carbon emissions. But analysts say that based on the rules, that figure could exceed the reductions required statewide for the entire cap-and-trade program. That means offsets – until now offered mostly as voluntary credits to companies hoping to burnish their green image – could soon become a major part of California’s lucrative mandatory program.
Experts estimate that the higher price for California’s state-issued carbon allowances, currently more than $14 per metric ton, make the use of cheaper offsets, projected to bring costs down to about $10, especially attractive. If California industries do require at least 200 million offsets over the next eight years it would make them worth more than $2 billion on the market.
The high financial stakes make accurate measurement of offsets a key concern. Cap-and-trade sets carbon allowance targets based on gases detected from smokestacks at the state’s 350 largest polluting companies at about 600 facilities. By contrast, offsets are calculated as comparisons with predicted future “business-as-usual” levels of pollution.
This modeling requires teams of scientists and economists to anticipate choices that companies would have made had the offset payments not been available. And as any economist will admit, predicting the future is hard.
Even when emissions cuts are proved to prevent the business-as-usual growth scenario, the exact amount of carbon dioxide stored or released comes with great scientific uncertainty. Supporters of offsets concede that it is hard to verify whether the offsets are valid.
The use of offsets is also associated with unintended consequences such as increases in other pollutants locally, loss of biodiversity in timber plantations and reduced incentives to invest in local mitigation technologies.
That is why some scientists and environmental advocates say cap-and-trade should not incorporate offsets.
“The integrity of the offsets is the integrity of the cap-and-trade program, because of how strongly the program is relying on them,” said Brian Nowicki, California climate policy director at the Center for Biological Diversity, an environmental group headquartered in Tucson, Ariz.
Offsets preapproved for California’s cap-and-trade program are thus far restricted to U.S.-based projects in four sectors – industrial forestry, urban forestry, dairy digesters and destruction of ozone-depleting substances.
The Air Resources Board has developed elaborate protocols for each. The first round of credits, totaling 6 million metric tons of carbon from 45 offset projects, are expected to go on sale after a final staff review, according to a Reuters Point Carbon analysis.
The board is considering adding offsets from other domestic sectors, such as methane capture from rice plantations and mines. It will expand the program internationally, linking up with Quebec’s offset program in 2014. It is also considering including offsets from a controversial program called Reduced Emissions from Deforestation and Degradation, or REDD, that offers carbon credits for preserving forests and plantations in Mexico, Colombia and other developing countries.
One obvious benefit of offsets for polluters is lower-cost mitigation. Since global warming can be addressed by reducing greenhouse gases anywhere, offsets proponents say innovative projects out of state or in other countries can achieve reductions more cheaply.
“You want to make the program as cost-effective as possible to reduce the economic burden of the program for California consumers,” said Gary Gero, president of Climate Action Reserve, a Los Angeles-based organization that helped California design the four offset protocols and one of two groups screening companies seeking California credits. He said offsets offer businesses now outside cap-and-trade an incentive to curb emissions through innovation.
Critics say this reasoning ignores myriad uncertainties that beset offsets, including measurement, verification and environmental justice concerns.
The conundrum facing climate offsets policy is the debate over “additionality” – whether emissions reductions would have been made anyway. Carbon-saving technologies include installing methane-capture devices at large dairy farms or keeping trees standing for 100 years instead of 50.
But there is no counterfactual world against which to measure which reductions are real. In many instances they must accept offset developers at their word.
Economist David Roland-Holst at the University of California, Berkeley, said background changes in consumer demand for products and services with a lower carbon footprint make additionality difficult to determine.
“Rising energy prices and a rapidly increasing public desire for environmental quality will drive emerging markets toward pollution mitigation,” he wrote in a recent paper on sustainable economics.
But Roland-Holst notes that relying on offsets also produces “unwelcome secondary effects.” If industries meet the majority of their cap-and-trade requirements through out-of-state offsets, local air pollution in California’s industrial areas would worsen.
In June 2012, two environmental groups, Citizens Climate Lobby and Our Children’s Earth Foundation, sued the state. They said offsets “credit emission reductions that would occur or have already occurred without the incentive of offset credit payments,” resulting in “false accounting of progress.” They sought a court order prohibiting offsets trading.
But a San Francisco Superior Court judge rejected the petition in January, saying the judiciary could not rewrite the statute. Our Children’s Earth Foundation filed an appeal on May 24. A hearing date has not been set.
State officials say that they have developed stringent standards for additionality, and that offsets are subject to continuous monitoring. If the state finds flawed credits, they will be invalidated.
“There are third-party verifiers who have been certified by us and there are more of them being trained,” said Air Resources Board spokesman Clegern, adding that independent experts will do on-site inspections.
“If ARB finds malfeasance by any party that developed or verified the offset,” he said, the state “can take enforcement action on that party.”
Larger than they seem
Steven Cliff, manager of the cap-and-trade program at the Air Resources Board, said it was “premature” to make assumptions about the scope of the offsets program.
Offsets, he said, “can account for a pretty high portion of overall reductions. But under the most likely scenario, offsets would cover no more than 41 percent of the reductions.” Cliff based his assessment on a 2011 white paper by Adam Diamant, an energy and environment analyst at the nonpartisan, nonprofit Electric Power Research Institute.
More recent assessments by Diamant and at least one other independent researcher, Barbara Haya, a fellow at the Stanford Environmental Law Clinic, show that offsets could represent a big chunk of the allowed emissions from industry – anywhere from 53 percent to 224 percent of required carbon reductions, measured cumulatively through the year 2020.
Diamant said the range of projections is so wide because the calculations depend on several variables. The first is the overall cap. The state plans to block off a small portion of credits each year to ensure a steady price for allowances. This reduces California’s emissions limit. But if demand for allowances is high, the state will release reserves starting at $40 per metric ton.
Other complementary state policies aimed at reducing greenhouse gases might further reduce emissions. These include energy efficiency, mandates on electric companies to produce renewable energy, and the low-carbon fuel standard for vehicles. That would ease the reductions requirements under cap-and-trade. If reserve allowances were untouched and complementary policies achieved their targets, total allowed offsets could add up to more than twice the reductions needed to make cap-and-trade work.
Achieving reductions from complementary programs achieves the same overall environmental goals, Diamant said. “So it’s not like nothing is happening.”
But critics say that if industries can buy offsets to meet all their reductions requirements in the program’s first eight years, technological innovation could stagnate. They say it also deprives California of the environmental, economic and public health benefits that Gov. Arnold Schwarzenegger promised when the global warming law was passed in 2006.
“The more offsets you allow to be used,” said Nowicki of the Center for Biological Diversity, “the more you put the program at risk.”
Forest or tree farm?
The risk is most evident in the case of forest offsets, which market analysts predict is the sector where the bulk of California offsets will be generated.
“Forestry offers the greatest opportunity, but it is also by far the most complicated and challenging offset protocol,” said Belinda Morris, California director of the American Carbon Registry, another agency certifying offsets for the state.
Environmentalists say the state’s forest protocol, which rewards carbon sequestration through reforestation, forest management and avoided conversion of forests to other uses, contains several fundamental flaws.
The rules do not account for “critical carbon pools” on the forest floor. It also inadequately accounts for soil carbon released during logging, said Nowicki of the Center for Biological Diversity. The protocol only accounts for soil disturbance through “deep ripping, furrowing or plowing” on more than 25 percent of a project area, which can cover several thousand acres.
The U.S. Department of Energy’s guidelines for voluntary greenhouse gas reporting estimates that one acre of typical California mixed-conifer forest contains 60 percent more carbon collectively stored in soil (19.2 tons), litter and duff (12.6 tons), down deadwood (2.6 tons), understory (0.9 tons) and standing deadwood (2.5 tons) than in live trees (25.4 tons).
Nowicki said even conservative estimates like these show that if logging takes place on smaller parcels, soil disturbance could dramatically change the overall carbon storage capacity of the area: “The worst case would be that the project gets carbon credits in a year that they should actually show a carbon deficit if they had fully accounted for the soil carbon emissions.”
California’s forest protocol is also the first in the world to credit durable wood products, including building materials and furniture, that lock carbon out of the atmosphere for a long time.
The Air Resources Board says objections to state rules are premature because none of the proposed offsets have yet been approved for the market.
That the forest protocol allows timber companies to sell offsets by replanting trees in areas they clear-cut is among the most controversial of the state rules. This is called “even-aged management” – a stand of trees all planted at the same time, for future harvesting.
Landowners may clear-cut up to 40 acres at once, as long as they show that tree growth elsewhere in the project area stores more carbon than is lost.
But environmental groups contend that making even-aged management more profitable undermines less damaging alternative carbon storage options. Clear-cutting degrades forest ecosystems, water quality and wildlife diversity, scientists say.
Initial drafts of the forest protocol disallowed clear-cutting. But around 2007, the timber industry began to seek more favorable rules.
Some of the most aggressive lobbying came from Sierra Pacific Industries, California’s wealthiest timber company and largest private landowner. It made sure to regularly attend offset rule-making workshops hosted by Climate Action Reserve. The company, which owns nearly 1.9 million acres of timberland in California and Washington, has long sparred with environmentalists who oppose its clear-cutting practices.
A recent report by the Center for Investigative Reporting found that between 2007 and 2008 Sierra Pacific Industries hired a Sacramento lobbying firm, California Strategies, for $37,500, to present its case. In September 2007, the company sent a letter to the Air Resources Board requesting rule changes to permit even-aged management and storage of carbon in wood products.
The board accepted most of the recommendations. But the decision to include clear-cutting led to a schism among environmentalists.
Nearly 50 groups, including the Sierra Club, Friends of the Earth, Rainforest Action Network and Buckley’s Central Sierra Environmental Resource Center, urged the Air Resources Board to exclude offsets for clear-cutting. But other big green groups, such as the Nature Conservancy, the Environmental Defense Fund and the Pacific Land Trust supported the idea.
“It’s a sticky situation, but it’s probably the best way to get landowners to follow better forest management practices,” said Paul Mason, vice president of policy and incentives at the Pacific Land Trust.
Mark Pawlicki, director of corporate affairs and sustainability at Sierra Pacific Industries, said the company’s influence in framing the forestry protocol was completely aboveboard: “It was an open and public process, and there were many diverse groups involved. We just participated in the process like anyone else in the public would.”
Rajinder Sahota, the Air Resources Board’s offsets policy manager, dismissed criticisms that carbon accounting was imprecise and that the standards for additionality were lacking.
“With an approved forest project you can have situations where you are able to harvest within a geographical boundary and also sequester carbon at the same time,” Sahota said.
Wildlife vs. carbon
Sierra Pacific Industries is now preparing four offset project areas on its land totaling 80,000 acres for approval by the Air Resources Board. This includes the clear-cut area near Yosemite that Buckley surveyed. The company owns about 130,000 acres of forestland in the area. Viewed from an airplane, its land resembles a patchwork quilt of green forests and brown clear-cut land that stretches for miles.
Pawlicki said improved land management practices in the project areas would remove an additional 5.6 million tons of carbon from the air over 40 years. That would yield the Redding-based company $56 million at current offset prices.
For Buckley, who finds clear signals of climate change in the Sierra Nevada’s rapidly receding snow line, this is worrisome news.
“It is not the loss of a 20-acre block of forest that hurts any particular species, because most wildlife can move to another area when bulldozers and chainsaws destroy a block of forests,” he said.
Aggressive logging and replanting, he explained, leads to “a loss of the biggest trees – most of the oaks, dogwoods, maples and alders, and most of the plant diversity. It wipes out blocks of habitat, one after another, that are important shelter and food sources for wildlife species that depend upon mature shady forest conditions.”
Heavy logging has been associated with the disappearance of the American marten and Pacific fisher from that corner of the Sierra Nevada, and has affected populations of the spotted owl, the northern goshawk, the pileated woodpecker and the northern flying squirrel.
“To somehow claim that this will reduce greenhouse gas emissions and have no impact on the environment,” Buckley said, “is ridiculous.”
This story is part of a special report on California’s cap-and-trade program, in collaboration with San Francisco Public Press and Bay Nature magazine. It was made possible by the Fund for Investigative Journalism.