{"id":4996,"date":"2018-10-17T12:35:20","date_gmt":"2018-10-17T19:35:20","guid":{"rendered":"http:\/\/probable-carton.flywheelsites.com\/?p=4996"},"modified":"2019-03-12T11:03:00","modified_gmt":"2019-03-12T18:03:00","slug":"future-supply-and-demand-of-california-carbon-offsets","status":"publish","type":"post","link":"https:\/\/stillwaterassociates.com\/future-supply-and-demand-of-california-carbon-offsets\/","title":{"rendered":"California Carbon Info: Future Supply and Demand of California Carbon Offsets"},"content":{"rendered":"

As the passage of AB 398 has strengthened and extended California\u2019s Cap and Trade program, we think our readers will benefit from a spotlight on the trends in the carbon credit market. As such, we periodically feature guest articles on California\u2019s Cap and Trade program from our friends at\u00a0CaliforniaCarbon.info<\/a>. CaliforniaCarbon.info is a comprehensive information service covering the Western Climate Initiative (WCI) carbon market in North America. CaliforniaCarbon.info provides emissions and price forecasts, and regular analysis of the allowance and offset market. We are excited to feature their expert analysis on California\u2019s Cap and Trade program and the forces that impact the carbon credit market.\u00a0Look for regular articles from\u00a0Stillwater\u2019s LCFS Newsletter<\/a>\u00a0featured at CaliforniaCarbon.info.<\/em><\/p>\n

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October 17, 2018<\/p>\n

Entities that are covered by the California cap-and-trade program have an annual compliance surrender obligation, in line with their emissions that year. Entities can fulfill the annual and triennial compliance obligation by surrendering compliance instruments. Eligible compliance instruments are California Carbon Allowances (CCAs) and California Carbon Offsets (CCOs). An entity must surrender compliance instruments to the total value of their compliance surrender obligation using a combination of CCOs and CCAs. While CCAs make up the majority of entities\u2019 compliance obligation, this report will focus on the use of CCOs in the next decade.<\/p>\n

CCOs are carbon offset credits that have been given CCO status by the California Air Resources Board (CARB), i.e. they have deemed the offsets to be eligible for use on the regulatory market. The offset part of the program was designed as a cost-containment mechanism. Entities are permitted to surrender up to 8% of their total emission obligation as CCOs. Offset credits are less expensive to buy than CCAs, hence using offsets keeps an entity\u2019s total compliance bill lower whilst simultaneously funding offset projects which have numerous other environmental benefits. In 2021, the rules for CCO surrender are changing under AB398, such that an entity may surrender just 4% of their total compliance obligation as offsets. This limit will then rise to 6% from 2026 to 2030.<\/p>\n

The supply of CCOs to the market is crucial to an entity\u2019s compliance strategy \u2013 in terms of availability and cost of CCOs. Since the cap-and-trade program began, CARB has issued over 135 million CCOs. Of these, there remain 88.2 million available for compliance, with the others having been either surrendered, invalidated, held in entities\u2019 compliance accounts or placed into a \u201cbuffer pool\u201d by CARB in case of unexpected invalidations.<\/p>\n

CARB issues CCOs bimonthly. The graph below shows the most recent CCO issuances\u00a0and evidences the inconsistent nature of the size of issuances (see graph on CaliforniaCarbon.info to track future issuances).\u00a0 Vast forestry projects have the ability to add a sudden glut of credits to the supply, as we saw in last week\u2019s issuance where Finite Carbon\u2019s Ahtna Forestry Project received over 14 million CCOs.<\/p>\n

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ARBOC = Air Resources Board Offset Credit<\/em><\/p><\/div>\n

CCOs from forestry projects currently account for around 80% of all issued CCOs, and because of this are vital to the supply of CCOs to the regulatory market. \u00a0So far in 2018, 43.7 million forestry CCOs have been issued by CARB. As per CaliforniaCarbon.info\u2019s short-term forecast model, a further 15.2 million forestry CCOs are expected before the end of the year. As shown in the graph below, the aforementioned Finite Carbon forestry project has accounted for most of the expected issuances in Q4 2018. There are still seven million credits expected in this quarter, of which three million are attributed to another Finite Carbon forestry project. There are also some delayed credits that were initially expected to be issued in previous quarters, totaling just under eight million. Due to the complex nature of forestry projects, and the calculations that must be validated, it is not uncommon for there to be a large lead-time before CARB issues a project CCOs. The forestry issuances expected in 2019 and 2020 are lower in volume, totaling 21.4 million and 17.2 million CCOs, respectively. \u00a0The forecast model is updated every two weeks, following CARB\u2019s bimonthly CCO issuance.<\/p>\n

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Taking a look at CCO supply on a longer timescale, the chart below shows expected CCO issuances up to 2030. As well as considering projects that have already been listed, future project listings have also been simulated based on historical trends of the various protocols.<\/p>\n

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Of course, examining the supply of CCOs is the most valuable when considering what future demand may look like. Whilst entities are permitted to offset up to 8% of their total obligation (changing to 4% and 6% in 2021 and 2026, respectively), not all entities chose to max out this quota or surrender any offsets at all. Many factors influence the uptake of surrendering offsets as part of an entity\u2019s compliance surrender, including but not limited to:<\/p>\n