REDD in the USA: Feds Grapple with Forest Carbon Offsets

Phil Burgert

The United States looks set to implement a cap-and-trade regime for greenhouse gas emissions regardless of whether the next President is named Obama or McCain – and all signs point to a significant role for forestry offsets. The Ecosystem Marketplace has been asking project developers for their take on the debate.

1 September 2008 | Senate Republicans shot down the Boxer-Lieberman-Warner Climate Security Act in June, but remnants of that ambitious bill – which described an intricate system for coordinating the reduction of greenhouse gas emissions to a cap 70 percent below 2005 levels by the year 2050 – are still kicking around both chambers of Congress, along with scores of other proposals expected to show up in bills later this year.

Several proposals visible so far include forestry offsets – usually in a form compatible with Reduced Emissions from Deforestation and Degradation (REDD). Although the debate over forestry offsets isn’t likely to heat up until after the November elections, several trends are already evident.

The Learning Curve

US lawmakers are just beginning to grasp the classic carbon market debates over baselines, permanence, and leakage that define the role of forests in a cap-and-trade system, and that naiveté shows in the June draft of Boxer-Lieberman-Warner. Terms like “offsets” and “allowances”, for example, are often used interchangeably, making it difficult at times to understand when the bill refers to an allowance issued to regulated entities by the government or to emission reduction certificates generated by a clean development project outside the regulated entities.

“If the bill passed as written, there would be 150 lawyers with a whole new profession,” says Bill Reynolds, senior vice president of SCC Americas, the US subsidiary of UK project developer Sindicatum Carbon Capital.

“I’ve personally spoken to some of the drafters, and they’ve got a huge learning curve,” he says. “A lot of the staffers who are putting that together will be more fluent by the time the second bill arrives.”

The Green Light

Advocates of forestry offsets say legislators tend to understand the two key arguments for embedding forestry offsets in a cap-and-trade regime – namely, the ability to use forests as carbon sinks, and the ability to bring the developing world into a cap-and-trade regime.

“The fact that we got a provision in the Boxer-Lieberman-Warner bill that is clearly for forest carbon – forest carbon broadly defined to include (avoided) deforestation plus afforestation and reforestation – I think is a good indication that Congress understands this issue,” says Gustavo A. Silva-Chí¡vez, an international climate change policy analyst in Environmental Defense Fund’s (EDF) climate air program who has been working to make sure that US legislation has provisions on REDD as well as forest carbon.

“Congress does not want to be alone in the global effort to reduce emissions,” he says. “Deforestation can bring developing countries into the mitigation effort.”

Environmental Defense is part of the Forest Carbon Dialogue, a coalition of organizations and corporations “speaking for the trees” on Capital Hill. The Coalition includes other members such as The Nature Conservancy, Conservation International, Woods Hole Research Center, PG&E, and American Electric Power.

Getting It Right

Kyle W. Danish, an attorney with Van Ness Feldman in Washington who has worked as counsel for a group of businesses called the Coalition for Emissions Reduction Projects, says the debate has largely moved beyond whether to include forestry offsets, and onto nitty-gritty questions of how to best structure the regime.

“I think that many people see enormous potential for forestry as a category of offsets,” he says. “However, as with all types of offset projects, there are questions about how to design policy to make sure that forest projects are additional – to ensure that the program is not just crediting forest activities that are occurring anyway.”

Danish says that under a future legislative program, forest activities could be funded in two ways. One possibility is the clean development route: letting regulated entities invest in activity that reduces deforestation in exchange for credits. The other is less market-driven and more administrative.

“Some portion of the allowances for the emissions cap could be set aside to support forestry,” he says. “The program either could auction those allowances and give the revenue to individuals or governments that implement forestry activities, or the allowances could be transferred directly to the individuals or governments – which would (permit) the recipients to sell the allowances for profit.”

The Lessons of Boxer-Lieberman-Warner

Boxer-Lieberman-Warner embraced both approaches – essentially recognizing three different mechanisms for reducing emissions: allowances given away by the government, allowances auctioned by the government (with the money being used to fund a variety of mitigation and adaptation programs), and offsets, which are used to fund emission reduction projects outside of the regulatory cap both in the United States and abroad.

Of these three, allowances given away are by far by the easiest to understand: the government sets a cap, and then the US Environmental Protection Agency (EPA) translates this cap into emission allowances, which members of regulated industries can trade among themselves in the aim of promoting the most efficient reductions possible.

Forestry and agriculture aren’t covered by industrial caps, but Boxer-Lieberman-Warner impacts them via the other two mechanisms: allowances that are auctioned to the highest bidder, and offsets.

Money from Auctions: Spending It

Under Boxer-Lieberman-Warner, most allowances would be given away in the early years, with a small percentage being auctioned off to the highest bidder. Over time, the percentage of allowances auctioned would increase, and the money raised would go to a variety of projects designed to do everything from promoting new technologies to helping people in high-carbon industries develop new skills.

Boxer-Lieberman-Warner won high marks for putting a certain amount of the money raised into a capacity-building fund for countries that don’t yet have the institutions to provide the kind of credible information on the state of their forests that the evolving REDD regime requires.

“It’s useful to use some proceeds from auctioning to help countries develop the necessary infrastructure – whether it’s a national baseline or more measuring and monitoring and so on,” says Eric Bettelheim, chairman of London-based Sustainable Forestry Management Limited (SFM). “There should be some public assistance, particularly to lesser developed countries, who cannot afford or simply don’t have the means to participate in the market without such assistance.”

Offsets: the Tricky Bit

Tree Huggers also gave the most recent version of Boxer-Lieberman-Warner high marks for recognizing forestry offsets – both international and domestic. They were less enthusiastic, however, about the criteria for determining which offsets could be used and which could not.

In a nutshell, the bill said that regulated entities could meet up to 15% of their reduction requirement through offsets generated by recognized clean development projects outside the capped sectors. In theory, all of that could come from forestry, and up to 10% could come from abroad.

It’s how the “in theory” part plays out that has developers worried: the bill seemed to let developers go international only if there aren’t enough domestic offsets, and it gave the US EPA the authority to determine when that is the case.

Institutional Uncertainty

One aspect of the EPA’s role drew criticism from several project developers: namely, the fact that, under Boxer-Lieberman-Warner, the EPA would have been able to determine every year anew which projects are valid and which are not.

“Providers of credits – whether they are project developers or intermediaries like financial institutions – can’t function on the basis of not knowing from year to year whether these or those credits will be salable,” says Bettelheim.

Determining Qualified Countries

Boxer-Lieberman-Warner also laid out clear guidelines for determining the types of institutions that a country must have if its forestry projects are to be credible, and the list clearly reflects mainstream thought on the debate over REDD – namely, that the countries be able to measure their forests and provide historic data. The bill also left the door open for projects in countries that are not able to meet national baseline requirements.

“They’re recognizing the need to reward or be willing to issue of offsets at the project level if the country is not up to some national-level program,” says Leslie Durschinger, Founder and Managing Director of San Francisco-based Terra Global Capital LLC. “For me, that was really important, and as you know that’s a really big issue playing out right now under the Kyoto REDD scheme, and the need remains to continue to motivate project-based actions.”

Price Caps and Floors

Boxer-Lieberman-Warner didn’t mandate price caps and price floors on allowance prices, but it did have a provision for loaning allowances to some companies and carrying out a “cost-containment auction” with extra allowances being sold between $22 and $30 in 2012.

“That’s very dangerous when looking at investment and risk,” says Reynolds. “It’s the single biggest concern that we have.”

The US-EU Split

The US and Europe currently look at forestry differently, Silva-Chí¡vez says, noting that the EU views forestry as a generator of cheap credits, while the US is leaving everything on the table and trying to figure out how to create a market.

He also suggests that the difference of opinion may flow from the fact that Europe has already chopped down the bulk of its forests.

“They don’t have that many forests whereas the US has a ton,” he says, adding that the EU also is making an effort to maintain a high price for carbon.

“They want to make sure that the cap is set so that companies see that it is in their interest to invest in low-carbon technology,” he says. “I think in the US, there is more of a concern in terms of what the compliance costs will be. The focus is: ‘Let’s lower those as much as possible.'”

Coming Together?

The United States and other countries are examining the potential for REDD mitigation to use in negotiations on emissions reductions and payments with Indonesia, Brazil and other developing countries during the 15th Conference of the Parties to the United Nations Climate Change Convention in Copenhagen in late 2009, Silva-Chí¡vez says.

He also believes the US and EU views are beginning to converge, crediting United Nations workshops in advance of Copenhagen showing that the science and technology are credible.

“I think right now many countries and many NGOs are keeping their options open,” he says. “It is very likely that we will have a good deal in Copenhagen that has forest provisions that will be equally enforced in the EU, in the US and elsewhere.”

Bills in the Works

The US Congress is divided into two chambers, analogous to the upper chamber (the Senate) and the lower chamber (the House of Representatives) of parliamentary systems. Cap-and-trade legislation has been discussed in both chambers, but only the Senate has gotten far enough to actually introduce (and shoot down) a bill – the aforementioned Boxer-Lieberman-Warner.

The House has commissioned studies and held hearings – mostly at the behest of Democrats John Dingell and Rick Boucher (who represent states beholden to the automobile and coal industries, respectively) – with separate proposals coming from Democrats Lloyd Doggett, Henry Waxman and Edward Markey.

Details on the House efforts remain sketchy, but all are said to echo Boxer-Lieberman-Warner’s treatment of forestry.

Dealing with the Locals

Federal lobbyists say they have not been focusing on comparisons between the federal climate change legislation proposals and the potential results of other state and regional cap-and-trade programs now being implemented like California’s AB 32, the state’s Global Warming Solutions Act passed in 2006, and the Regional Greenhouse Gas Initiative (RGGI) of several northeastern US states. But they acknowledge that there may be some overlap.

Indeed, Boxer-Lieberman-Warner made it clear that credits and offsets from these regional efforts, as well as from the Chicago Climate Exchange (CCX), might be transposable into the federal scheme – with the EPA’s approval, of course.

“I think that whatever federal system comes out is going to play a major role,” Silva-Chí¡vez says. “Because in many countries it is so cheap to reduce emissions from deforestation, from the US perspective you want those cheaper tons for compliance. A cheaper cost for a cap and trade regime is going to make it more likely that the US Congress will pass strong cap-and-trade legislation as soon as possible. Cheaper compliance costs will benefit US consumers. Developing countries that protect their forests will receive compensation for forest protection. And most importantly, the climate benefits from lower emissions. It’s a win-win situation for everybody.”

Phil Burgert is a writer and editor based in Oak Park, Ill. He can be reached at [email protected].