Climate Action Reserve’s Gary Gero: Navigating the American Carbon Market

Gary, as president of the Climate Action Reserve, please share your organization’s involvement in the California Air Resources Board’s 2013 allowance auctions.

Gary Gero: Climate Action Reserve’s role is that of an accredited offset project registry, which is an official recognition by the State of California, to review offset project documentation, oversee verification, and issue credits that ARB then converts into compliance offsets for use in the cap-and-trade program. The offsets provide a compliance flexibility and price pressure release mechanism so that entities which are subject to the cap—when going into the auction, such as will be occurring next month and then again in August—can strategize on where they can get the most cost-effective emissions reductions to lower the overall cost of compliance with the program while still ensuring we achieve our greenhouse gas emission reduction targets. 

How should the public evaluate the success of CARB’s auctions under AB32? Likewise, how should Climate Action Reserve’s programmatic role in assuring the integrity of the offsets be judged?

Gary Gero: I think, in general, the way to gauge the success of the program overall and of the auctions in particular is to determine if we are setting a price on carbon that actually motivates the reduction of emissions—because the ultimate goal of the program is to reduce greenhouse gas emissions—but does so in a way that is protective of our economy and that actually helps build toward a new cleaner economy.

I think the way to judge an auction in that regard is by asking, “Are credits selling fully and at a sufficient price?” If the allowances are fully sold, then that means that there are some companies that are actually  making emissions reductions rather than obtaining credits. Also, are they selling the auction at a reasonable price, that is, a price that is not causing economic harm? So far, both auctions that have occurred have done that. Both auctions have had complete subscription to the current year vintages—in fact, oversubscription. The prices are considered by both analysts to be pretty reasonable—a little over ten dollars in the first one and then up to thirteen dollars in the second one. I think that’s a good sign that the program is stable and creating the right incentive to reduce emissions cost effectively.

In terms of judging the success of our program, since we’re dealing specifically with the offsets component, the real way to judge success in the offsets arena, first and foremost, is to ensure that there’s actual, real environmental integrity to the claim that an emissions reduction has occurred. The public, legislators, and policymakers should be looking to see that the program is actually functioning in a way that is robust, transparent, and achieves real emissions reductions.

The second way to judge it is to see if it’s helping to reduce the overall costs of compliance to make sure that we’re getting the emissions reductions we want, in a way that maximizes cost effectiveness. As long as you see offsets selling at a reasonable discount to allowances, then I think you are able to determine that, in fact, the program is successful, and that’s the case today. Today, as I mentioned, allowances at the last auction sold for around $13; offsets these days are selling closer to ten, so they are providing the price pressure release that they are intended for.

With CARB’s May 16 auction and this summer’s nearing, what is considered to be the acceptable price band between the price of offsets and the price of carbon allowances?

Gary Gero: I think you’re likely to see that allowances in May are probably close to the $13 price—maybe slightly higher than what occurred in the last auction, but not a whole lot higher. If you’ve seen the market recently it’s crept up a bit from the $13 mark, but I think the real tell with regard to that auction is where the price of offsets are because so far offsets have not risen as quickly as allowance prices, creating a real opportunity for a lot of companies to identify and obtain less expensive emissions reductions. But as soon as companies start to realize that opportunity, we would expect the price of offsets to similarly rise.

What we see in other mature cap and trade systems is offsets selling at about a 10 percent discount to allowances. Right now, in the California program, we’re at a much bigger discount, but it’s early, so as the program matures we expect offsets prices to rise to somewhere between 80 and 90 percent of allowance prices.

Gary, elaborate on the tension between the allowance price and the offset price for our readers to better appreciate the market.

Gary Gero: I think you look at offsets as sort of a business opportunity. What’s the cost of production? That is, how much does it cost to create those emissions reductions and how much can you sell them for? Part of the beauty of a well-designed cap and trade program is you start to foster clean technology and green jobs. You get these small entrepreneurial companies that are essentially out there creating emissions reductions, and they’re doing that by going to, say, a dairy farmer and providing emissions reductions. There’s some cost to production, maybe five or six dollars a ton, but there’s opportunity in the way that these companies are making money, selling that same emission reduction to a compliance entity, and recognizing that the compliance entity has a marginal cost of abatement.

They can reduce the emissions on site, and that’s going to cost them some amount of money. They can go buy an allowance, and that’s going to cost them the auction price. Or they can buy an offset at a discount to those. Offsets tend to sell at a discount to allowances because they are an alternative to an onsite emission reduction whose cost of production is lower.

Climate Action Reserve, as you mentioned earlier, has created the protocols for four carbon offset programs that the ARB has approved as a cost-effective way for regulated companies to meet up to eight percent of their compliance obligations. Please elaborate on these different programs and protocols.

Gary Gero: We at Reserve have actually written a total of 14 offset protocols, and we’re very proud that the ARB has adopted four of those for use in the compliance program. We think that’s a significant achievement for any nonprofit organization to get regulatory recognition in that way. Of course, ARB adapted those protocols for use in the compliance program, so they are slightly different form those that we drafted. But they remain largely intact. They are currently considering two additional protocol types—coalmine methane and rice cultivation that we also pioneered.

There are three primary areas where emissions reductions can be had and can create offsets. Forestry and urban forestry (under one rubric you might consider those all forest-type projects), and here what we’re talking about is sequestering carbon. As trees grow, they take carbon out of the atmosphere, hold it in their roots, trunks, and limbs. Under the rules that we’ve drafted and that were adopted by ARB, there are a number of mechanisms to ensure the ongoing permanence of that sequestration (permanence here meaning holding it for 100 years). Then credit is generated that can be used to offset emissions at a covered entity like a power plant or refinery.

The second one, really an area of clean technology innovation, is looking at how manure is managed at dairy farms. Typically it’s put into an open air lagoon, methane is produced at it anaerobically digests, and methane is a terribly potent greenhouse gas, 23 times stronger than CO2. That methane under ordinary circumstances would just seep out into the atmosphere. Here there are a number of companies that have developed technologies to cover and capture the methane coming out of those lagoons to use for generating electricity on site or injecting it into a pipeline, really providing a clean energy alternative and destroying the methane at the same time. So that’s a growing area where green house gas offsets are generated.

The last is one that people don’t think about often, but refrigerant in air conditioners and air-conditioning equipment is a highly, highly potent greenhouse gas, something like 20,000 to one compared to CO2. One pound, which you’d find in a standard household refrigerator, is much more destructive than a motor vehicle driving around. Typically what happens with these old gases under normal circumstances is, because they are highly dangerous for the stratospheric ozone layer, their production has been banned, creating a market for the reuse and recycling of the gas. It continues to be taken out of older refrigerators and air conditioners and put into still operational but old and leaky appliances where it tends to leak out over time. The offset market actually provides an economic incentive to send the gas to a destruction facility, thereby avoiding emission into the atmosphere and preventing both ozone depletion and climate change. 

Gary, both you and Joel Levin (Vice President, Business Development) from Climate Action Reserve participated in VerdeXchange 2013. At that VX2013 conference, high level representatives from Quebec, China and Australia shared their policies and plans for implementing cap-and-trade. How essential it is for more jurisdictions than California to be involved in cap-and-trade for it to truly work?

Gary Gero: Of course California recognizes that we are not going to solve climate change on our own. You could get California down to zero emissions and climate change would proceed at pace. Really what California is doing here is building a program and demonstrating that you can transition to a clean energy economy, reduce greenhouse gas emissions, build green jobs, and do all of it in a way that is not only not harmful to the economy but actually beneficial.

By setting that kind of example, we start to build a big tent of partners who want to join with us to do that. As you mentioned, Quebec is very interested in doing that; they have adopted a cap-and-trade program. They have not yet issued allowances or held auctions, but their program is effective as of 2013, and they’re looking to join California to form a boarder initiative. Australia similarly has today a carbon fee or tax but is looking to transition that into more of a cap-and-trade-style program.

All of these actors coming together start to build a movement, if you will, around reducing greenhouse gases in a way that is, again, cost effective, protective of the environment, and fosters a green energy economy. The goal here is, of course, not that California, Quebec, and Australia or any number of other jurisdictions that might join come along in this movement, but that the movement can actually drive national and international action. We need the federal government to step up and take on climate change in a real and robust way. 

Would it be fair to say we also need China?

Gary Gero: We also need China and India and all the other international players to come to the table as well. The way we do that is by taking the leadership role, and that’s precisely what the State of California has done. The state’s said, “We will be the leader, we’re going to step up and build this system from the bottom up rather than waiting for a UN-style, top-down approach.” As states and provinces and regions start to come together to create this patchwork system, you get increasing pressure for national and international action.

Let’s close, Gary, by sharing plans for the April 16-18th Climate Action Reserve conference in San Francisco. What’s the agenda and level of participation?

Gary Gero: Our “Navigating the American Carbon World” conference has been our flagship event for eleven years. It is now the largest climate policy carbon market conference in the United States. We’re expecting about 800 people in attendance, and that includes government officials from across the world, environmental organizations, business interests, and academics. It really does pick up on the themes we were just talking about.

This is a conference to come learn about the California experience (and there will plenty of sections that go into a great amount of detail on the California experience), but also, the conference looks outward and is meant to bring in the international sector. This year, Christiana Figueres, head of the UN Climate Change Secretariat, will be keynoting; there will be a section on international action, where California fits into that broader international picture. There will also be an opportunity to hear from some of the partner jurisdictions that are thinking about cooperating with California—Quebec and other Canadian provinces will be there, and, of course, others like Mexico and Australia will be there.

The most significant part is that it’s really the companies that are subject to this, and they come to learn what California is doing and to ensure that there’s consistency in approaches so that they are not subject to multiple regulatory regimes in multiple jurisdictions. So if we can start those conversations to create consistency in approach, we can make a much more streamlined, cost-effective, and ultimately broader approach to addressing climate change.

The dates are April 16-18 at San Francisco’s Palace Hotel, and we’ll probably have close to 40 to 50 speakers covering nearly 20 topic areas. We’re proud to have Mary Nichols headlining and other great speakers including Larry Schweiger, head of the NWF, Joe Goffman of USEPA, Matt Rodriquez of CalEPA, and folks from Disney, WWF, and lots of other market participants and major companies.