Memorandum

WYOMING LEGISLATIVE SERVICE OFFICE

Research Memorandum

MARKET-BASED CLIMATE POLICIES

BACKGROUND

June 2021 by

Clarissa Nord, Associate Research Analyst

Increasingly, government entities and non-governmental organizations have implemented a variety of market mechanisms to address the reduction or mitigation of greenhouse gas (GHG) emissions. Market-based climate policies provide a financial incentive devised to elicit a specific response from those responsible for pollution.1 These strategies include a variety of approaches such as cap-and-trade systems, voluntary carbon offset markets, baseline-and-credit programs, and carbon taxes.2 Market-based climate policy options can be applied as economy-wide solutions, or to address specific market segments or sectors.3 This research memorandum highlights several carbon offset approaches and summarizes other states' market-based climate policies.

CARBON MARKETS

The development of carbon markets stems from the Kyoto Protocol, an international treaty the United Nations (UN) adopted in 1997 and first implemented in 2005. The Protocol served as the first addition to the 1992 UN Framework Convention on Climate Change and committed industrialized and developing nations to reducing GHG emissions by adhering to agreed individual targets. There are currently 192 parties4, and the Protocol provides several approaches for countries to achieve their GHG emission-reduction targets.5

Carbon markets exist to address environmental goals, most commonly to reduce GHG emissions. There are two types of markets for carbon offsets, voluntary carbon offset markets and compliance carbon offset markets (cap-and-trade systems). For voluntary markets, interested individuals and

1 Janet Peace and Jason Ye, "Market Mechanisms: Options for Climate Policy" (Center for Climate and Energy Solutions, April 2020). 2 "Market-Based Strategies" (Center for Climate and Energy Solutions, 2020). 3 Ibid. 4 The U.S. signed the Kyoto Protocol in 1998. See: 5 "What Is the Kyoto Protocol?," United Nations Climate Change (United Nations Framework Convention on Climate Change), accessed May 18, 2021.

PAGE 1

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 2 OF 10

corporations can purchase credits to reduce their overall GHG emissions. 6 Conversely, cap-andtrade systems reduce GHG emissions from major sources by setting a mandatory threshold on GHG emissions while utilizing market mechanisms to attain emission-reduction goals.7

Basics: Carbon Offsets (Credits) vs. Allowances (Cap and Trade)

A carbon offset signifies a reduction, removal, avoidance, or sequestration of GHG emissions that individuals or corporations can purchase to compensate for GHG emissions that occur in another location.8 Carbon offset programs enable the private and public sectors to trade offsets in the form of credits that generally represent the equivalent of one metric ton of carbon dioxide emissions reductions.9 Carbon offsets are additionally produced by projects completed to intentionally reduce emissions and typically have objectives like preserving and maintaining forests or supporting methane reduction projects. Forestry carbon offset projects are particularly prevalent components of voluntary carbon offset markets and cap-and-trade systems, as they are often assumed to be an easily verifiable and low-cost method of achieving GHG emission reductions.10

From a scientific perspective, carbon offset programs and other market-based climate policies are feasible because GHG emissions accumulate uniformly throughout the earth's atmosphere; one ton of carbon dioxide emissions in one location has the equivalent impact of one ton emitted somewhere else in the world.11

Carbon allowances differ from offsets in that government entities issue them through an emissions cap-and-trade regulatory program and limit the supply of carbon allowances, which in turn creates scarcity. Regulated sectors can either purchase allowances depending on their circumstances, or they can sell allowances if they have excess. Another notable difference is that carbon allowances do not permit purchasers to select specific activities and projects that have sustainable development benefits. But carbon allowances establish an alternative method to carbon offsets for claiming emission reductions, and governments originally designed them to mitigate carbon offset project quality issues and concerns.12

6 "Maintaining Carbon Market Integrity: Why Renewable Energy Certificates Are Not Offsets" (Center for Climate and Energy Solutions, June 2009). 7 "Compliance Offset Program" (California Air Resources Board), accessed May 18, 2021. 8 "Maintaining Carbon Market Integrity: Why Renewable Energy Certificates Are Not Offsets" (Center for Climate and Energy Solutions, June 2009). 9 Ibid. 10 Jeremy Fried, "Do Carbon Offsets Work? The Role of Forest Management in Greenhouse Gas Mitigation" (United States Department of Agriculture Forest Service, August 2013). 11 Michael Gillenwater and Stephen Seres, "The Clean Development Mechanism: A Review of the First International Offset Program" (Center for Climate and Energy Solutions, March 2011). 12 "Allowances," Carbon Offset Guide (Greenhouse Gas Management Institute and the Stockholm Environment Institute, 2020).

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 3 OF 10

Compliance Carbon Offset Markets

Compliance offset programs (often referred to as cap-and-trade systems) place a limit on emissions, require regulated entities to hold sufficient allowances to cover their emissions, and offer flexibility for entities to achieve compliance. Put differently, cap-and-trade programs have two essential elements: (1) a cap on pollution and (2) purchasable allowances that permit regulated entities to emit a specific quantity of pollutants.13 When designing compliance carbon offset programs, it is important to consider targets and timeframes for reducing emissions, the sectors of the economy the program will cover, and the mechanisms for assessing the cost of administering the program.14

These programs incentivize regulated entities to buy and sell carbon allowances based on their needs. A restricted amount of allowances creates scarcity and compels entities to determine if it is more cost efficient to simply reduce their emissions below the cap, or if they need to purchase allowances. Individual circumstances vary, so for some entities it may be more advantageous to reduce their emissions, while others may find it difficult and costly to reduce emissions, which then encourages them to purchase allowances. Since a limited number of allowances exist in the market, value is ultimately created, leading to a price on GHG emissions. The price of GHG emissions establishes a continuous incentive for regulated entities to reduce emissions and innovate. If companies are especially innovative, they may generate revenue by selling their excess allowances they produce through their emissions reductions.15

One compliance carbon offset market the Kyoto Protocol established was the Clean Development Mechanism (CDM). First operational in 2006, the CDM was one of the first large-scale carbon offset programs and is still the primary international carbon offset program today.16 The CDM offers the public and private sectors in industrialized countries the opportunity to purchase carbon credits from offset projects in developing nations. The UN provides that the primary goal of the CDM is to encourage sustainable development and emissions reductions projects, while granting industrialized countries flexibility in how they reduce their GHG emissions.17 To date, the CDM has 7,854 registered projects,18 which can involve investments in renewable energy projects,

13 "What Is Emissions Trading?" (U.S. Environmental Protection Agency, December 17, 2019). 14 Michael Gillenwater and Stephen Seres, "The Clean Development Mechanism: A Review of the First International Offset Program" (Center for Climate and Energy Solutions, March 2011). 15 Janet Peace and Jason Ye, "Market Mechanisms: Options for Climate Policy" (Center for Climate and Energy Solutions, April 2020). 16 Michael Gillenwater and Stephen Seres, "The Clean Development Mechanism: A Review of the First International Offset Program" (Center for Climate and Energy Solutions, March 2011). 17 Ibid. 18 "Clean Development Mechanism (CDM)" (United Nations Framework Convention on Climate Change, 2021).

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 4 OF 10

landfill gas and methane avoidance projects, energy efficiency and distribution projects, and biomass energy projects.19

Carbon offset projects through the CDM can earn marketable certified emissions reduction (CER) credits, with one credit being equivalent to one ton of carbon dioxide emissions, which countries can count toward meeting their Kyoto Protocol targets. According to the UN Framework Convention on Climate Change, previously registered carbon offset projects are estimated to have produced CERs amounting to more than 2.9 billion tons of carbon dioxide equivalent emissions during the first commitment period of the Kyoto Protocol (2008?2012).20 Research demonstrates that the CDM contributes to an efficient funding of clean technology investment in developing countries.21 Some, however, have criticized the CDM specifically with respect to the governance of the program and the quality of approved carbon offset projects.22

Cap-and-trade programs currently operate in the European Union (EU), the United States (California and ten Northeast and Mid-Atlantic states), Canada (Alberta and Quebec), and are emerging in other countries and regions including China and South America. The EU Emissions Trading System is the world's largest cap-and-trade program covering 40 percent of the EU's GHG emissions.23

Voluntary Carbon Offset Markets

Voluntary carbon offset markets function outside of compliance markets and permit a variety of entities such as governmental organizations, non-governmental organizations, private investors, and corporations to purchase carbon offsets to independently reduce their GHG emissions. Some of the more common motivations for those who participate in voluntary carbon offset markets include corporate social responsibility and public relations.24 Corporations further engage in voluntary carbon offset markets as part of public relations efforts and to promote their voluntary initiatives to cater toward various buyers' preferences.25

Voluntary carbon offset markets can include a wide range of standards and protocols, but to increase the quality and credibility of voluntary offset markets, some programs have designed their standards to parallel compliance markets such as the CDM. Frequently, voluntary carbon offset

19 Michael Gillenwater and Stephen Seres, "The Clean Development Mechanism: A Review of the First International Offset Program" (Center for Climate and Energy Solutions, March 2011). 20 "The Clean Development Mechanism," United Nations Climate Change (United Nations Framework Convention on Climate Change), accessed May 18, 2021. 21 Michael Gillenwater and Stephen Seres, "The Clean Development Mechanism: A Review of the First International Offset Program" (Center for Climate and Energy Solutions, March 2011). 22 Ibid. 23 "Allowances," Carbon Offset Guide (Greenhouse Gas Management Institute and the Stockholm Environment Institute, 2020). 24 Marc N Conte and Matthew J Kotchen, "Explaining the Price of Voluntary Carbon Offsets," Climate Change Economics 01, no. 02 (2010): pp. 93-111. 25 "Voluntary Offset Programs," Carbon Offset Guide (Greenhouse Gas Management Institute and the Stockholm Environment Institute, 2020).

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 5 OF 10

programs intend to provide purchasers with greater transparency and confidence in the credibility and integrity of "certified" offset projects. Some voluntary market programs also attract buyers by prioritizing project designs that have local community and biodiversity benefits.26

Effectiveness of Carbon Markets

Previous research has showed that cap-and-trade programs in particular are effective in reducing GHGs under programs in Europe, California, and ten U.S. states in the Northeast and Mid-Atlantic regions. Market-based climate strategies also provide flexibility and the most economically efficient path for corporations to reduce their GHG emissions.27 Some opponents maintain that carbon offset programs permit governmental and non-governmental entities to continue to release GHGs, especially if the carbon offset projects are not credible.28

OTHER STATES' MARKET-BASED CLIMATE POLICIES

Thirteen states and the District of Columbia have implemented various market-based climate policies which focus on limiting GHG emissions from major portions of the economy, such as the power and transportation sectors. Market-based climate policies can be administered at the state level, as demonstrated by California, while others are carried out through regional agreements.29

Regional Initiatives

Two primary carbon offset or pricing regional agreements exist within the United States to limit GHG emissions from a variety of major sectors. First, the Regional Greenhouse Gas Initiative concentrates on reducing GHG emissions from the power sector. The second agreement, the Transportation and Climate Initiative, solely targets carbon reductions in the transportation sector.

The Regional Greenhouse Gas Initiative (RGGI) is a collaborative effort between ten states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont) to cap and reduce carbon dioxide emissions from the electric power industry.30 In 2019, Pennsylvania Governor Tom Wolf directed the state Department of Environmental Protection to initiate a rulemaking process to facilitate participation in the RGGI program and Virginia plans to join the agreement in 2021. Participating states formed the agreement in 2009 and the initiative is the first mandatory U.S. cap-and-trade program. States made the program mandatory by enacting statutes to implement the RGGI; for example, Maine enacted a bill in 2007 (in anticipation of the commencement of the initiative in 2009) to establish

26 Ibid. 27 Janet Peace and Jason Ye, "Market Mechanisms: Options for Climate Policy" (Center for Climate and Energy Solutions, April 2020). 28 "Maintaining Carbon Market Integrity: Why Renewable Energy Certificates Are Not Offsets" (Center for Climate and Energy Solutions, June 2009). 29 Laura Shields, "Greenhouse Gas Emissions Reduction Targets and Market-Based Policies," Greenhouse Gas Emissions Reduction Targets and Market-based Policies (National Conference of State Legislatures, March 11, 2021). 30 "Elements of RGGI" (Regional Greenhouse Gas Initiative), accessed May 18, 2021.

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 6 OF 10

the statewide carbon-dioxide cap-and-trade program (and, among other things, to create an Energy and Carbon Savings Trust).31

States administer and regulate the program through the establishment of their own cap-and-trade programs that place limits on in-state carbon dioxide emissions from electric power plants. The regulated entities (power generators) have several ways to comply with emissions, including implementing efficiency measures, switching fuels, using carbon capture and storage, or purchasing additional allowances at auction or from other generators. Power generators can also reduce their emissions by using offsets, which the RGGI program defines as "[...] emission reductions from sources other than power plants."32 The program permits generators to meet up to 3.3 percent of their compliance obligations through offsets, however considering allowance prices are fairly low, power generators have not extensively used offsets within the RGGI system.33

The Transportation and Climate Initiative (TCI) is an effort undertaken in 2010 by twelve states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia) and the District of Columbia to reduce carbon emissions from the transportation sector. State and district agencies direct the TCI, and each agency can individually decide whether and how they participate in projects and working groups.34 In December 2018, nine states35 and the District of Columbia announced their intent to design a regional approach to cap GHG pollution from the transportation sector. The program proposes to "[...] provide for each jurisdiction to invest program proceeds into low-carbon and more resilient transportation infrastructure."36

After the initial regional cap-and-invest announcement in 2018, participants released a framework in October 2019 determining which entities would be regulated under the program. In December 2019, TCI members distributed a memorandum of understanding (MOU) to require the development of a model draft rule for the program and commit contributing jurisdictions to implement the cap-and-invest program.37 Connecticut, Rhode Island, Massachusetts, and the

31 2007 Maine Laws Ch. 317, available at . 32 Janet Peace and Jason Ye, "Market Mechanisms: Options for Climate Policy" (Center for Climate and Energy Solutions, April 2020). 33 Ibid. 34 "About Us" (Transportation and Climate Initiative), accessed May 18, 2021. 35 Connecticut, Delaware, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island, Vermont, Virginia, and the District of Columbia. 36 Laura Shields, "Greenhouse Gas Emissions Reduction Targets and Market-Based Policies," Greenhouse Gas Emissions Reduction Targets and Market-based Policies (National Conference of State Legislatures, March 11, 2021). 37 Brief research did not reveal where any state has enacted legislation to mandate or provide for the TCI to be implemented in the state. In a transportation omnibus bill, the Vermont Legislature authorized spending for stateagency staff to negotiate the TCI. 2019 Vt. Laws Ch. 59, available at . Connecticut introduced legislation in its 2021 Session to require state agencies to adopt rules to implement the TCI

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 7 OF 10

District of Columbia will be the first jurisdictions to carry out the cap-and-trade program, while Maine and New Hampshire declined to sign a statement of support for the program. The next steps of the initiative include emissions reporting beginning in 2022 and the first compliance period starting in 2023.38

State-Level Initiatives

Two states currently administer individual state-level climate initiatives. California regulates multiple energy sectors through a statewide cap-and-trade program, while Massachusetts administers a statewide program to reduce emissions from electricity-generating facilities. A third state, Washington, had a state-level baseline-and-credit program but the state supreme court suspended the program in 2020. Finally, Hawaii considered implementing an in-state cap-andtrade program.

California

California's initiated its cap-and-trade program in 2006 as part of the Global Warming Solutions Act (Assembly Bill 32) to set limits beginning in 2012 on statewide GHG emissions while providing various market mechanisms to achieve the State's emission-reduction goals.39 Assembly Bill 32 requires the State to achieve 1990 levels of GHG by 2020, and 40 percent below 1990 levels by 2030.40 The program was the first multi-sector cap-and-trade program regulating electric generators, industrial plants,41 and fuel distributors (natural gas and propane fuel providers and transportation fuel providers). The program covers 85 percent of the state's GHG emissions. In 2014, California and Quebec connected their programs, which resulted in the first program linkage in North America.42

Under California's cap-and-trade program, regulated entities may use offset credits to meet a portion of their compliance obligation.43 The State restricts carbon offset projects to five areas: forestry, urban forestry, dairy digesters,44 destruction of ozone-depleting substances, and mine

in Connecticut. 2021 Conn. Senate Bill 884, available at . 38 Shields, supra note 34. 39 "Compliance Offset Program" (California Air Resources Board), accessed May 18, 2021. See also 2006 Cal. Assembly Bill 32, available at . 40 Rob Jordan, "Carbon Offsets Have Wide-Ranging Environmental Benefits" (Stanford University, August 14, 2017). 41 Regulated industrial facilities include refineries, cement production facilities, oil and gas production facilities, glass manufacturing facilities, and food processing plants that emit more than 25,000 metric tons of carbon dioxide equivalent. See: 42 Janet Peace and Jason Ye, "Market Mechanisms: Options for Climate Policy" (Center for Climate and Energy Solutions, April 2020). 43 "Compliance Offset Program" (California Air Resources Board), accessed May 18, 2021. 44 Dairy digesters are a type of renewable technology that uses livestock manure to produce methane, which developers can in turn utilize as a renewable source of electricity generation and transportation fuel. See:

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

June 2021 ? PAGE 8 OF 10

methane capture.45 Forest offsets account for the majority of the projects implemented under the State's program, and the offsets regularly involve forest owners modifying the way they manage their land so trees can store more carbon.46 The California Air Resources Board (separately established by statute) requires third-party verification for all carbon offset programs to ensure GHG reductions are quantifiable, permanent, and additional, meaning above what is legally required for any given project.47

Hawaii

In 2018, the Hawaii State Legislature directed the Office of Planning to investigate the establishment of a statewide carbon offset program and submit a preliminary report of its findings and recommendations. The Hawaii Office of Planning published its report in 2019 and concluded that implementing a carbon offset program could serve as one strategy the State could use to address GHG reductions, but the Office concluded that it is unlikely the program would generate significant revenue for the State through the production of offsets, especially considering the State would have to incur administrative costs.48

Massachusetts

Massachusetts' state-level cap-and-trade program, which is separate from the two regional initiatives, covers 21 fossil fuel-fired power plants and aims to reduce total carbon dioxide emissions from the facilities to 80 percent below 2018 levels by 2050. The state implemented this program in response to a State Supreme Court ruling and an executive order from their governor directing the Massachusetts Department of Environmental Protection to establish an integrated climate change strategy. 49

Washington

In January 2020, the Washington State Supreme Court suspended the State's Clean Air Rule, which set individual emissions caps for large GHG sources within the economy.50 The regulated sources would have included petroleum product distributors and importers and natural gas distributors. As part of the State's program, tradable offset credits would have been available to

45 "Compliance Offset Program" (California Air Resources Board), accessed May 18, 2021. 46 Rob Jordan, "Carbon Offsets Have Wide-Ranging Environmental Benefits" (Stanford University, August 14, 2017). 47 "Compliance Offset Program" (California Air Resources Board), accessed May 18, 2021. 48 "Carbon Offset Program Feasibility" (State of Hawaii Office of Planning), accessed May 18, 2021. Hawaii has since considered various legislation regarding carbon offsets, including a state-employee offset program and a program to offer offsets for purchase related to air travel. See, e.g., 2021 Hawaii Senate Bill 304, available at ; 2020 Senate Bill 2629, available at . 49 "Market-Based State Policy" (Center for Climate and Energy Solutions, 2020). See also Kain v. Dep't of Envtl. Protection, 49 N.E.3d 1124, 1142 (Mass. 2016) (holding that agency regulations were insufficient to meet statutory requirements related to attaining actual, measurable, and permanent emissions reductions). 50 Ass'n of Wash. Bus. v. Dep't of Ecology, 455 P.3d 1126, 1128 (Wash. 2020) (holding that Washington's statutory clean-air provisions limit the applicability of emission standards to actual emitters).

21RM011 ? LSO RESEARCH AND EVALUATION DIVISION ? 200 W. 24th Street ? Cheyenne, Wyoming 82002 TELEPHONE 307-777-7881 ? EMAIL lso@ ? WEBSITE

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download