Carbon Offsetting in the U.S.: Is There An Opportunity For International Players?

At first sight, the U.S. market of Carbon Offset is a little intimidating, starting with a first difficulty – understanding Federal vs. State initiatives. Let’s take a closer look…

Status on U.S. State Carbon Pricing Policies

Compared to command-and-control regulations (which sets specific limits for pollution emissions and/or mandates that specific pollution-control technologies must be used), carbon pricing is a market-based mechanism that creates financial incentives to reduce greenhouse gas (GHG) emissions. 

Cap and trade allows the market to determine a price on carbon, which drives investment decisions and spurs market innovation. Cap and trade differs from a tax in that it provides a high level of certainty about future emissions, but not about the price of those emissions (carbon taxes do the inverse).

European countries have operated a cap-and-trade program since 2005. Several Chinese cities and provinces have had carbon caps since 2013, and the government is working toward a national program. Mexico is running a pilot cap and trade that the country hopes to bring into force in 2018.

In the U.S., eleven states (accounting for a quarter of the U.S. population and a third of GDP) have active carbon pricing programs and are successfully reducing emissions: California and the Regional Greenhouse Gas Initiative (RGGI) made of ten Northeast states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont).

  • RGGI was the first mandatory cap-and-trade program in the U.S. to limit carbon dioxide emissions from the power sector
  • California’s program which followed was the first multi-sector cap-and-trade program in North America. 
  • More recently, two additional states (New Jersey and Virginia) have indicated a willingness to join RGGI. 
  • As of 2017, Massachusetts also implemented regulations to establish an additional cap-and-trade program for its power sector that runs in parallel with RGGI but extends out to 2050. 
  • Washington state moved forward with a market-based climate policy called the Clean Air Rule but this program is currently suspended while working its way through the court system.

Efforts to create a nationwide cap-and-trade system in the U.S. led to House passing the American Clean Energy and Security Act (commonly called the Waxman-Markey bill, after its lead authors) in 2009, but the effort died in the Senate.

Focus on California Cap and Trade

The California cap-and-trade program, launched in 2013, is one of a suite of major policies the state is using to lower its GHG emissions. It covers the six gases defined in the Kyoto Protocol (CO2, CH4, N2O, HFCs, PFCs, SF6), plus NF3 and other fluorinated greenhouse gases.

It is the fourth largest in the world, following the European Union, the Republic of Korea, and the Chinese province of Guangdong. 

California’s emissions trading system is expected to reduce GHG emissions from regulated entities by more than 16% between 2013 and 2020, and by an additional 40% by 2030. It is a central component of the state’s broader strategy to reduce total GHG emissions.

  • In 2006, the Legislature passed the California Global Warming Solutions Act, Assembly Bill 32 (AB 32), creating a comprehensive, multi-year program to reduce GHG emissions in California.
  • AB 32 requires the California Air Resources Board (ARB) to develop a Scoping Plan that describes the approach California will take to reduce GHGs to achieve the goal of reducing emissions to 1990 levels by 2020
  • The Scoping Plan was first approved in 2008 and must be updated every 5 years. 
  • First Update was approved in 2014. 
  • In 2016, the Legislature passed SB 32, which codifies a 2030 GHG emissions reduction target of 40% below 1990 levels
  • ARB is moving forward with a second update to the Scoping Plan to reflect the 2030 target set by Executive Order B-30-15 and codified by SB 32. 

In terms of Geography, around 450 businesses responsible for 85% of California’s total GHG emissions must comply. Note that California has linked its program with similar programs in Ontario and Quebec, meaning that businesses in one jurisdiction can use emission allowances issued by one of the others for compliance, therefore broadening the number of businesses under the cap and leading to additional economic efficiencies.

Regarding the Industry scope, the cap-and-trade rules first applied to electric power plants and large industrial plants that emit 25,000 tons of carbon dioxide equivalent per year or more. Beginning in 2015, the program was extended to fuel distributors meeting the 25,000-metric ton threshold (e.g., natural gas and petroleum).

The Emission Targets also named Allowance Budget have been defined as follows:

  • 162.8 MMT in 2013 (electricity and industry)
  • 394.5 MMT in 2015 (includes all covered sectors)
  • 334.2 MMT in 2020
  • 200.5 MMT in 2030

The auction process takes place quarterly, in a single round, with a sealed bid and uniform price. The price minimum began at $10 in 2012 and increases 5% annually over inflation. As for the price maximum, additional allowances are available for sale when prices reach an upper threshold, set at $40 in 2012, increasing 5% annually over inflation. Beginning in 2021 a hard price ceiling will be set, and an unlimited supply of allowances will be available at this price. Investor-owned utilities must consign their free allowances to be sold at auction; must use proceeds for ratepayer benefit.

The Carbon Offset market(s)

A carbon offset is a reduction in emissions of GHG made in order to compensate for emissions made elsewhere. It pertains to investment in environmental projects with the sole objective of balancing carbon footprints. It’s a practice that has increasingly gained popularity globally with more and more carbon offset providers joining the initiative.

The Kyoto Protocol has sanctioned offsets as a way for governments and private companies to earn carbon credits that can be traded on a marketplace. The protocol established the Clean Development Mechanism (CDM), which validates and measures projects to ensure they produce authentic benefits and are genuinely “additional” activities that would not otherwise have been undertaken. Organizations that are unable to meet their emissions quota can offset their emissions by buying CDM-approved Certified Emissions Reductions.

There are actually two identified markets for carbon offsets:

  • Larger, compliance market: companies, governments, or other entities buy carbon offsets in order to comply with caps on the total amount of carbon dioxide they are allowed to emit. 
  • Smaller, voluntary market: individuals, companies, or governments purchase carbon offsets to mitigate their own GHG emissions from transportation, electricity use, and other sources. An individual might purchase carbon offsets to compensate for the GHG emissions caused by personal air travel. 

Carbon offset providers primarily work to reduce future emissions by investing in clean energy technologies, planting trees, or buying and compensating for the carbon emitted from emissions trading scheme. Offset providers widely vary in terms of their areas of focus, charges, and locations. 

Main Carbon Offset providers in the U.S.

The following players have been identified as the most noticeable.

1. Sustainable Travel International,

  • Reduces impact of carbon footprint through tourism and travel. In partnership with NGOs, governments, companies and communities, works towards sustainable development goals to limit the adverse effects of climate change by selling carbon credits with regards to flying or other travel activities and using the funds to protect the planet’s terrestrial ecosystems. 
  • Focuses on preventing deforestation, irresponsible development, and over-exploitation. Supports biodiversity conservation, clean and renewable energy, and planting trees.

2. Green Mountain Energy,

  • Offers high quality standards on carbon offset provision, ensuring that the carbon offsets are sourced from reputable and verified third party industries.
  • Main areas of operation include the advancement of forestry projects, waste water treatment, promoting energy efficiency and the use of renewable energy, and the capture of methane gas at landfills.

3. Native Energy,

  • Provides carbon tracking services, carbon offsets, and renewable energy credits.
  • Partners with Green America in promoting actions towards reducing carbon footprints by funding new solar, wind, water, and conservation projects. Helps to finance new wind turbines, renewable energy at schools, and methane gas capturing on family farms.
  • Help build Native American, farmer-owned and renewable energy projects. 

4. WGL Energy,

  • Offers money-saving and reliable carbon offset options for individuals, businesses and organizations across the US.
  • Invests the carbon offsets to reduce carbon footprint on projects such as tree planting, water conservation and management, and the development of future clean air.

5. Cool Effect,

  • Reduces carbon emission by funding carbon-reducing projects across the globe as a crowdfunding platform.
  • Fights climate change by finding impressive projects around the world that have a proven track record of reducing carbon emissions.

6. ClearSky Climate Solutions,

  • Manage climate change problems by designing and supporting market-based forest carbon
  • Provides customized technical assistance through periodic workshops, seminars, and training programs throughout the year.

7. Sterling Planet,

  • Develops green power projects and supports hundreds of clean energy generators.
  • EPA has more than once recognized Sterling Planet as an award winning green power supplier of the year. 
  • Captures greenhouse gas emissions caused by energy use and personal transportation.
  • Assures buyers that their offsets are of high-quality, real, additional – more than “business as usual,” and permanent.

8. 3 Degrees,

  • Delivers renewable energy products and climate change consultancy for universities, small businesses, government agencies, and even Fortune 500 companies
  • Has about 8.8 million verified carbon offsets delivered. 
  • Sources top-notch, third party verified carbon offsets from emission reduction initiatives. 

9. BEF Carbon Mix,

  • Provides a myriad set of programs, products and tailored solutions that aid in mitigating environmental footprint. 
  • Designs and strengthens renewable energy technology, water conservation and management, forest management, waste heat capture and landfill gas capturing.

10. TerraPass,

  • Expands and supports farm power, production of clean energy from wind power, and capturing landfill gas.
  • Focuses on car and airplane emissions, home energy use, and offsets schemes for business as well as for wedding events. 
  • Utilizes the funds from carbon credit purchases to fund projects such as wind power, landfill gas capture, and improving forest management.

11. Carbon Solutions Group, 

  • Captures 100% of landfill methane. 
  • Focuses GHG emission monitoring, green building projects, carbon and renewable energy projects, and emissions management and mitigation.
  • Experts including financial traders, policy analysts, multi-disciplined engineers and environmental consultants.

Opportunity for new entrants and international players?

Yes there is definitely an opportunity for international players, but one must be prepared and define a clear go-to-market strategy, not underestimating the complexities of the Federal vs. State regulations.

In terms of offering and marketing, for a new player entering the U.S. market of carbon offset, presenting the following attributes is a must-have:

  • Transparency: Customers and prospects should be able to easily get the information they are looking for on the provider’s website. 
  • Certification: Green-E helps individuals figure out which offsetting programs are reliable, and The Climate Action Reserve sets standards, rules, and protocols for offsetting projects. As a new entrant, one of your first steps should be to receive this certification.
  • Genuineness: As many scams are invading this market, it is even more important for a new entrant to prove that the persons, organizations, or projects in which customers invest, do actually exist.

If you want to know more about carbon offset and international specificities, please let us know. Our team is available to discuss U.S. market potential for your carbon offset business.

Author: Sylvia Gallusser, Founding Partner at big bang factory

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